IS A 15 YEAR MORTGAGE FOR YOU?

Article courtesy of Realtor.com

mortgage3

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.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

15 VS. 30 YEAR MORTGAGES

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.
Facebooktwittergoogle_plusredditpinterestlinkedinmail

UNDERSTANDING ENERGY EFFICIENT MORTGAGES

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.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

YOUR MORTGAGE: PAY ATTENTION TO THE POINTS

mortgageIn terms of your mortgage, a point is an additional loan fee that is paid to the lender in exchange for a lower interest rate. It’s called “buying down,” and it allows you to reduce your rate for the life of the loan.

Let’s say you secured a mortgage loan for $500,000 without points, at 4.6% on a 30-year mortgage, your payment would be approximately $2,560 a month. If you paid two points ($10,000), the interest rate would go down to 4.1% and the monthly payment would decrease to around $2,415, a savings of $145 a month.

It would take you about eight years to recoup the money you paid up front. If you are planning on staying in your home a while, this will save you money in the long-run. Before deciding, ask yourself:

  • How long will I keep the home?
  • Do I have extra money to pay points?
  • Could that money be better used for something else?

Some may suggest that a smarter option is to invest that $10,000 because you could do much better than your $140 savings, but you have to weigh the variables.*

Here are three simple rules of thumb in determining your particular course of action:

  • If you plan to stay in the house for less than three years, do not pay points
  • If you plan to stay in the house for more than five years, pay 1 to 2 points
  • If you’ll be in the house for three to five years, paying points doesn’t make a significant difference

Since points are interest-payment related, they may be deductible on your taxes in the year that you close. See your tax advisor for details.

Mortgage points can add up to valuable savings over the course of your loan, but the future isn’t always predictable. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could alter that plan.

* The above example is for illustrative purposes only. Be sure to check with your financial or tax advisor regarding your particular situation.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

WHEN IS IT WORTH IT TO REFINANCE?

Article courtesy of Realtor.com

With mortgage rates dipping, you may be thinking about a refinance of your mortgage.

Whether or not you should refinance depends on your mortgage and current financial situation.

When you refinance your home, you pay off your current mortgage in full by taking out a new mortgage.

There are three common scenarios for refinancing:

  1. You want to score a lower interest rate and/or gain quick equity.
  2. You have a home equity loan in addition to your mortgage and you’d like to combine your loans.
  3. You can’t make your monthly payments, so you want to get into another plan to save your home.

Mortgage application

There are a few specific reasons why you might want to refinance your mortgage:

Changing the loan length

If a new loan offers you a lower interest rate at the expense of a longer mortgage term, it might not be worth it. Longer loan terms mean more money paid in interest and a slower gain in equity.

But if you have a shorter loan, say a 15-year fixed-rate mortgage, and want to refinance into a 30-year loan because the monthly payments are too tough, it’s probably a smart idea. Be sure to get a mortgage without any prepayment penalties and pay more toward your principal each month.

Increasing monthly payments

You can refinance to increase your monthly payments in order to gain equity faster. However, if you don’t have prepayment penalties or a high interest rate, you should just funnel extra cash toward your mortgage payments each month. If you do have prepayment penalties, it’s probably a wise decision to refinance into a loan without them.

Cash-out refinancing

Cash-out refinancing is when you take out a new mortgage that’s larger than your current one. The difference between the two loans is paid out in cash.

If you’re in financial distress and need some cash, this move may help. Cash-out refinancing usually offers a lower interest rate than a credit card, but it puts your home on the line. Plus, the overall interest you pay on the new mortgage may be significantly more, because it’s over the term of many years.

Recouping closing costs

A new interest rate may be great, but because it takes money to refinance, you need to determine how many months it’ll take before you recoup any closing costs.

Use a mortgage calculator to figure out how long it will be before you’ll see real savings, and how much you’ll save over the life of the loan. Don’t forget to shop around and check your good-faith estimate with your settlement statement for junk fees.

Facebooktwittergoogle_plusredditpinterestlinkedinmail