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One of the best ways to eliminate your mortgage debt is moving into a 15-year fixed-rate loan. With the average spread a full 1% compared to its 30-year counterpart, a 15-year mortgage can provide an increased rate of acceleration in paying off the biggest obligation of your life.

Can you pull it off?

In most cases, you’re going to need strong income for an approval. How much income? The old 2:1 rule applies. Switching from a 30-year mortgage to a 15-year fixed-rate loan means you’ll pay down the loan in half the amount of time, but it effectively doubles up your payment for each month of the 180-month term. Your income must support all the carrying costs associated with your home including the principal and interest payment, taxes, insurance, (private mortgage insurance, only if applicable) and any other associated carrying cost. In addition, your income will also need to support all the other consumer obligations you might have as well including cars, boats, installment loans, personal loans and any other credit obligations that contain a monthly payment.

The attractiveness of a 15-year mortgage in today’s interest rate environment has mass appeal. The 1% spread in interest rate between the 30-year mortgage and a 15-year mortgage is absolutely real and for many, the thought of being mortgage-free can be very tempting. Consider today’s average 30-year mortgage rate of around 4% on a loan of $400,000—that’s $287,487 in interest paid over 360 months. Comparing that to a 15-year mortgage over 180 months, you’ll pay a mere $97,218 in interest. That’s a shattering savings of $190,268 in interest, but there’s a catch—your monthly mortgage payment is going to be significantly higher.

Here’s how it breaks down. The 30-year mortgage in our case study pencils out to a $1,909 monthly payment covering principal and interest. Weigh that against the 15-year version of that loan, which comes to $2,762 a month in principal and interest, totaling $853 more per month, but going to principal. This is why the income piece makes or breaks the 15-year deal. Independent of your other carrying costs and other credit obligations, you’ll need to be able to show an income of $4,242 a month to offset just a principled interest payment on the 30-year fixed-rate mortgage. Alternatively, to offset the principled interest payment on the 15-year mortgage, you would need an income of $6,137 per month, essentially $1,895 per month more in income, just to be able to pay off your debt faster. As you can see, income is a large driver of debt reduction potential.

What to do if your income isn’t high enough

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

Lenders are going to consider the minimum payments you have on all other credit obligations in the following way. Take your total proposed new 15-year mortgage payment and add that number to the minimum payments on all of your consumer obligations and then take that number and divide it by 0.45. This is the income that you’ll need at minimum to offset a 15-year mortgage. Paying off debt can very easily reduce the amount of income you might need and/or the size of the loan you might need as there would be fewer consumer obligations handcuffing your income that could otherwise be used toward supporting a stable mortgage plan.

Can you borrow less?

Borrowing less money is a guaranteed way to keep a lid on your monthly outflow maintaining a healthy alignment with your income, housing and living expenses. Extra cash in the bank? If you have extra cash in the bank beyond your savings reserves that you don’t need for any immediate purpose, using these funds to reduce your mortgage amount could pencil very nicely in reducing the 15-year mortgage payment and interest expense paid over the life of the loan. The concept of the 15-year mortgage is “I’m going to have to hammer, bite, chew and claw my way through a higher mortgage payment in the short term in order for a brighter future.”

Can you generate cash?

If you can’t borrow less, generating cash to do so may open another door. Can you sell an asset such as stocks, or trade out of a money-market fund in order to generate the cash to rid yourself of debt faster? If yes, this is another avenue to explore.

You may also want to explore getting additional funds via selling another property. If you have another property that you’ve been planning to sell such as a previous home, any additional cash proceeds generated by selling that property (depending upon any indebtedness associated with that property) could allow you to borrow less when moving into a 15-year mortgage.

Are you an ideal match for a 15-year mortgage?

Consumers who are in a financial position to handle a higher loan payment while continuing to save money and grow their savings would be well-suited for a 15-year mortgage. The other school of thought is to refinance into a 30-year mortgage and then simply make a larger payment like you would on a 25-year, 20-year or 15-year mortgage every month. This is another fantastic way to save substantial interest over the term of the loan, since the larger-than-anticipated monthly payment you make to your lender will go to principal and you’ll owe less money in interest over the full life of the loan. As cash flow changes, so could the payments made to the loan servicer, as prepayment penalties are virtually nonexistent on bank loans.

There is an important “catch” to taking out a 15-year mortgage—you also decrease your mortgage interest tax deduction benefit. However, if you don’t need the deduction in 15 years anyway, the additional deduction removal may not be beneficial (depending on your tax situation and future income potential).

If your income is poised to rise in the future and/or your debt is planned to decrease and you want to have comfort in knowing by the time your small kids are teenagers that you’ll be mortgage-free, then a 15-year loan could be a smart move. And when your mortgage is paid off, you’ll have control of all of your income again as well.

Proximity to retirement is another factor borrowers should consider when carrying a mortgage into retirement isn’t ideal. These consumers might opt to move into a faster mortgage payoff plan than someone buying a house for the first time.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well.



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money_houseThere are plenty of reasons why many people today aren’t financially prepared for retirement. We’re living longer, so we have to stretch our savings further. And the pensions that helped previous generations have largely vanished.

But that doesn’t mean it’s time to panic quite yet.

Truth told, many on the cusp of retirement do have one source of cash that could help them close the gap between what they have for retirement and what they’ll need to live well: their home.

In fact, the majority of senior Americans have more money in home equity than they do in their retirement portfolios, according to an analysis last year by the Center for Retirement Research at Boston College. So how much cash are you sitting on, anyway? To figure out your home equity, subtract the amount you owe on your mortgage from the current market value of your property. Next, to see whether you’ll need that money in retirement, plug your other info (excluding the value of your home equity) into a retirement calculator, then see whether you’ll be able to comfortably live without it.

“A lot of people think of their home equity as their Plan B for retirement, but for a lot of people it really has to be their Plan A,” says Jenna Rogers, a client adviser with Mission Wealth.

If it looks like you’re going to have to tap your equity, you’ll want to make a plan for the best way to do so. Here are five options, and the benefits and drawbacks of each.

Option 1: Sell and move

This is probably the first thing retirees think of doing with their home, and for good reason: Many retirees feel liberated after shedding their excess stuff to move to smaller digs.

Pros: By selling and moving to a less expensive house or region, you’ll not only bolster your portfolio with the proceeds, you’ll also lower your monthly expenses. And if you move to a condo or apartment, you won’t have to deal with external home maintenance issues anymore.

Cons: Moving can be stressful and far from ideal. Nearly two-thirds of baby boomers don’t plan to move in retirement, according to a 2014 survey by the Demand Institute.

Option 2: Open a HELOC

If you have enough cash to cover your day-to-day needs but no cushion for unexpected expenses such as medical bills, a home equity line of credit can serve as an emergency fund.

“For somebody who doesn’t have a cash safety net, a HELOC is a way to get peace of mind,” says Andrew Rafal, president and founder of BaynTree Wealth Advisors.

Pros: You get to stay in your home. You’ll have to pay only the interest on the amount you use during the “draw period,” typically 10 years. Interest rates are so low now that those payments will be pretty minimal.

Cons: When the draw period ends, you’ll need to pay back the principal as well—and rates will likely be higher than they are now. So if you use a HELOC, focus on paying off the debt before the adjustment hits.

You typically need to prove your income to get approved for a HELOC, so if you’ve already retired you may have trouble securing one. A lender can also freeze a HELOC if it’s concerned your home’s value has gone down or you’ll be unable to make the payments.

Option 3: Use a reverse mortgage

A reverse mortgage allows you to tap your home’s equity but is different from a HELOC in that you don’t have to pay it back until you move or pass away.

Pros: Unlike a HELOC, which is good for short-term borrowing, a reverse mortgage gives you cash for the long haul in the form of monthly checks, says Damon Gonzalez, founder of Domestique Capital.

Cons: The fees associated with a reverse mortgage are high, although they’re typically rolled into the loan so you won’t have to pay them upfront. Since a reverse mortgage can eat through the equity in your home, there may be little or none left to pass on to your heirs, or if you eventually decide to move.

Option 4: Become a landlord

It may not be a huge investment to turn part of your home into an apartment with its own kitchen, bathroom, and entrance. Or, you can rent out your entire home for all or part of the year, rent a smaller unit yourself, and pocket the difference.

Pros: You can cover or offset your housing costs with rental income—and postpone selling your home for longer than you might otherwise be able to.

Cons: You’ll have to deal with all the headaches that come with having tenants. Be ready for 3 a.m. phone calls, and have enough cash in reserve that the apartment or home can be vacant between renters.

Option 5: Do a sale/leaseback to your kids

If passing the family home to your children is important to you, you may be able to sell it to them now and then pay rent so that you can continue living there.

Pros: You get to stay in your home and ensure that it remains in the family.

Cons: Your children have to agree to the deal and have the cash to make it work. You’re also setting yourself up for potential conflicts with your children if you ultimately have trouble paying the rent or need them to take care of repairs or other issues.



mortageWhich is better: A 30-year fixed-rate mortgage or go for a lower-interest 15-year one?

Typically, 15-year mortgage allows you to pay off your mortgage quicker and save a significant chunk of money on interest. However, a 30-year may be a logical choice for most people because it has more advantages. Let’s take a look at the differences:

  • Payments are less with a 30-year mortgage which enables more consumers to qualify for home purchases.
  • Generally, you can make additional principal payments to pay off your loan faster without penalty.
  • A 15-year loan means you are committed to giving that extra money to your lender each month, whether you can really afford to at the time or not.
  • The higher payments of a 15-year mortgage make little sense if they keep you from building savings or contributing to a 401(k) plan, IRA or college fund.
  • The amortization schedule of 30-year fixed is back-heavy, with early-term payments big on interest and light on principal.
  • A 15-year fixed is always light on interest which lowers its taxpayer benefits.

While it’s true you gain more of a tax break from a 30-year loan, it shouldn’t be the main consideration when deciding on a term. The 30-year borrower pays less in yearly taxes because they pay significantly more in interest.

So it all comes down to choice and circumstances:

  • Choose the 15-year loan if you have the financial wherewithal to assume the payments. Your interest savings will be substantial and you’ll own your home faster.
  • The 30-year loan offers lower payments and greater flexibility. You can always choose to pay more on your mortgage when the money is available.


bulbEnergy Efficient Mortgages (EEMs) were formally introduced by the Federal Housing Administration in 1995 to help consumers save money on utility bills by enabling them to finance the cost of energy-efficiency features for their new or existing homes as part of their FHA-insured home purchase or refinanced mortgage. The U.S. Department of Energy maintains that an EEM is one of the most beneficial programs consumers can use to capitalize on in today’s real estate market.

You can participate without the need to qualify for additional financing because cost-effective energy improvements result in lower utility bills—making more funds available for mortgage payments. You can upgrade windows and doors, install active and passive solar technologies, insulate an attic, replace older heating and cooling systems and fix or replace chimneys, etc.

The maximum cost of improvements you can add to your mortgage is either 5% of the property’s value (not to exceed $8,000) or $4,000, whichever is greater based on your property’s value. FHA requires that you make at least a 3.5% cash investment on your property based on the sale price. The total mortgage amount is based on your home’s value plus the projected cost of energy-efficient improvements.

Experts believe that an EEM can add an additional 15% of a home’s appraised value to the principal of a new loan or refinance, often at no additional cost, no compromise in the loan-to-value ratio for the borrower and perhaps a better rate. Benefits will vary and your lender will be your best source on what benefits you may obtain. Energy efficiency becomes an attractive selling point when you place the property on the market.

You may apply for an EEM with any HUD-approved lender, such as a bank, credit union or mortgage company.Click here for more information on EEMs.


Good Faith No More: How Will The New Mortgage Rules Affect You?

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mortgageThe mortgage game might be the same, but the rules have changed to favor homebuyers instead of lenders.

The Consumer Financial Protection Bureau (CFPB) is pinch-hitting for HUD. Its mission: to make sure another housing crisis, like the one from 2008, never happens again. One way to help achieve that goal is to make the buying process clearer to consumers, whether you’re looking at homes for sale in Houston, TX, or Sarasota, FL.

“As of October 3, 2015, when you apply for a new mortgage, you’ll receive new disclosures designed to ease the process of taking out a loan, help you save money, and ensure you know before you owe,” says Tricia McClung, assistant director of mortgage markets for the CFPB.

In a nutshell, the mortgage process should now be more transparent to consumers and include information that helps homebuyers figure out what they can afford to buy. The new rules, called “Know Before You Owe,” help borrowers — in most cases, anyway.

Here’s an overview of the changes and what they mean for you.

Some history

Before the new mortgage disclosures went into effect, homebuyers were presented with the TMI (too much information) version of mortgage documents: a Truth-in-Lending disclosure with the Good Faith Estimate and then another Truth-in-Lending disclosure with the HUD-1 Settlement Statement. And those were just the forms’ names. As you can imagine, it was a tad complicated. And lenders didn’t even have to disclose everything.

“The old Good Faith Estimate and the HUD-1 did not spell out the two most important things to most consumers: knowing what their new payment will be and how much cash will be required at closing,” says California mortgage consultant Greg Cook.

The change

The CFPB replaced the four documents with two simpler ones: the Loan Estimate and the Closing Disclosure. The new forms “help you shop for the best deal and avoid costly surprises at closing,” says McClung.

Homebuyers now have “a better perspective of the true cost of their loan instead of having to compare multiple documents with conflicting figures,” says Frank Berriz, CEO of California Members Title Insurance Co.

The three-day-wait rule

The new CFPB mortgage disclosure rules call for a three-day period to allow buyers to look over and become familiar with the Closing Disclosure before they get to the settlement table. This marks “the biggest overhaul of the mortgage process in decades,” says Amiel Hagai Steuerman, president of Cypress Mortgage in Illinois.

The three-day period “gives you time to ask your lender all the questions you might have about the terms of your mortgage, as well as consult with an adviser or housing counselor,” says Tricia McClung.

“Borrowers will know every tax, fee, and risk. And they will know if there are any penalties for paying off the loan early or whether there is a balloon payment at the end,” says Gloria Shulman, a California mortgage broker.

The mulligan, or the do-over

If the loan product changes during the three-day review period, you must start over and take another three days to review those changes. Just what triggers the additional three-day period includes the following:

  • If the annual percentage rate (APR) increases by more than ⅛ of a percent for a fixed-rate loan and ¼ of a percent for an adjustable loan. (If the APR decreases, the additional three-day period is not required.)
  • If a prepayment penalty is added.
  • If the basic loan changes, such as from a fixed rate to an adjustable one.

Minor changes such as a typo on a closing document or the discovery at walk-through of a bedroom window that won’t open — causing you to want a credit from the buyer — won’t trigger the extra three-day wait.

But even still, “Problems could arise with the three-day disclosure period, creating a domino effect,” says Frank Berriz. “If a closing is delayed by the buyer, it will directly impact the closing of the house the seller is trying to buy.”

The new normal: a 45-day closing?

A typical closing takes 30 days, but many lenders now assume they’ll need more time to close. “In the early going, consumers might expect to see the mortgage process lengthened — approximately 45 days to close rather than the previous 30 — as the new disclosure rule is implemented,” says Sharon Voss, real estate agent and president of the Orlando Regional REALTOR® Association.

“A consumer in a hurry is not going to have an easy time of it,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage. “Most of the waiting periods are mandatory; they cannot be waived.”

This three-day rule, although well-intentioned, could cause you to lose out. If you’re in a hot market and it takes 45 days to close, a cash buyer who’s ready to close quickly might be a lot more attractive, leaving you to clear the game board and start a whole new one.

But once the dust settles, the closing time frame should adjust. “We expect to get back to previous processing times within a few months,” says Fleming.

Dealing with a longer closing period

Gloria Shulman offers two tips to help ensure you aren’t burned by a longer closing:

  • Ask for a rate lock longer than 30 days.
  • Avoid any loan that does not waive the per diem charge for late closings.