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Refinancing? Cut your term at the same time — and save a small fortune

September 6th, 2012

You may be interested to refinance your current mortgage in order to save money. But for those with sufficient disposable income, an even greater savings could be achieved by also cutting the term of the mortgage.

With current mortgage rates so low, it’s easy to overlook just how interest payments add up. If you can afford to halve the term of your home loan from 30 years to 15 years, you stand to save tens of thousands of dollars. Using LoanBiz.com’s Payment and Amortization Loan Calculator, you can see just how big these savings could be for you.

Mortgage refinancing + shorter term = huge savings

Suppose you want to refinance a $150,000 mortgage. At a mortgage rate for 30-year fixed loans of 3.29 percent, your monthly payment would be $656.11 and the total amount of interest you would pay over the life of the loan would be $86,198.53. Your house would end up costing $236,198 when you finished paying for it.

But if you shorten the term to 15 years, the mortgage rate drops to 2.72 percent. Even though your monthly payment would be nearly $360 higher at $1,015.79, the total amount of interest you would pay over the life of the loan would be just $32,842.65 — approximately 60 percent less. Your house would cost only $182,842 when you finished paying for it. That’s a savings of over $53,000.

In addition, by shortening your term in this way, you would be free of all mortgage payments in 15 years, and that means you could invest all the money you would otherwise be paying out on your home loan in ways that could seriously improve your retirement.

Mortgage loans and tax relief

When covered this topic for The Los Angeles Times in August 2012, he comprehensively demolished the argument that it’s worth paying mortgage interest because you get tax relief on it. He made two important points:

  1. Your deduction is only worth whatever your tax bracket is. So, if you are paying 15 percent tax, you’re still paying 85 cents of every dollar you spend on mortgage interest out of your own pocket.
  2. There is no guarantee (in spite of what many politicians are saying today) that mortgage interest is going to remain deductible.

Clearly, reducing the term of a mortgage isn’t for everyone. But if you can afford to do so, it may be a good time to explore your options.

Peter Andrew

Peter Andrew has over 25 years of experience writing about marketing, advertising and management. He regularly covers consumer credit card topics for IndexCreditCards.com and other personal finance publications including Fox Business and MSN Money. He also writes frequently about mortgages and auto loans. Peter has spent extended periods living overseas, in the UK, France and Africa. He lives with his partner of 20+ years, and wastes too much of his time on cryptic crosswords.

Should you accelerate mortgage loan payments?

March 13th, 2011

Many Americans have slashed their spending and are doing without in order to pay off debt and lessen the effects of the troubled economy. Paying off mortgage loans early has become more popular, something that many financial experts have traditionally advised against.

Getting free of a mortgage

The argument for accelerating payments on a home mortgage is that you build equity faster and ultimately will own it free and clear of any debt obligation. You will always have the security of knowing that the place is yours as long as you want it to be. Paying off a home mortgage in full also would likely free up a significant chunk of your income, allowing you to have more control and freedom to use it for other purposes.

Using income for other investments

Those who are against accelerating mortgage payments often cite the loss of the mortgage interest tax deduction. They also point out that instead of putting extra cash toward a home loan, the money could be invested in mutual funds or other investments that may earn you more money. Also, during the years when you are accelerating mortgage payments, you may have less income to put toward other things.

Biweekly mortgage payments

Before you starting attacking your mortgage debt for a faster payoff, learn as much as you can about the various methods. Biweekly mortgage loan payments can allow you to pay off a 30-year mortgage about six years ahead of schedule. Instead of making mortgage payments once a month like a lot of borrowers do, you make a payment every two weeks. So instead of making 12 payments a year it works out to 13 payments.

Most mortgage lenders allow biweekly payments, but usually charge a fee to set it up. Skip the fee and set up your own biweekly mortgage payment plan. Check with your mortgage lender to see if you can send half of the payment every two weeks. If the lender won’t allow it, divide the monthly payment by 12 and add that amount to the payment on the principal each month.

Use cash windfalls

Use bonuses and other cash windfalls to pay down mortgage debt. Make sure you don’t need the money for other expenses that are more pressing than paying off a mortgage. For instance, putting lump sums of cash toward credit card debt can wipe out high interest payments, which would give you a better return on your money than paying off low interest mortgage debt.

All-cash deals made up 28 percent of home purchases in 2010

March 4th, 2011

Having enough money to purchase a home outright might seem like a fantasy, but 28 percent of all homes bought in 2010 were all-cash deals, according to a recent Wall Street Journal article. Areas that had more depressed housing markets had more all-cash purchases.

Among the areas that saw a lot of these purchases is Miami-Fort Lauderdale, were over 50 percent of purchases involved cash buyers. About 42 percent of real estate purchases in Phoenix were all-cash deals.

“The prices were just irresistible,” Richard Stoker, who paid cash for two condos in Miami Beach, Fla., told the Wall Street Journal. “Florida’s been hit pretty hard.”

No mortgage loans

Buyers who pay with cash may receive a discount off the price of a home.They also have the freedom that comes with owning a property free and clear of a mortgage. Often people who are able to purchase a house with cash are investors. According to San Diego-based DataQuick, “All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who don’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.”

While investors are more likely to do all-cash deal, that doesn’t mean that there aren’t buyers out there who can afford to buy a home without a mortgage. The Money Saving Mom blog describes in a series of articles how one couple scrimped and saved to get the money they needed to buy a home in an all-cash deal. Buying a home with cash isn’t for everyone and requires a lot of sacrifices and careful planning. To determine if it is even possible to aim for the goal of buying a house with cash, you may need to work with a financial advisor to put together a plan.

What if you need a mortgage?

If, however, paying cash is too unrealistic of a goal to achieve, you’ll need to plan for getting a home loan if you want to buy a house. Be prepared to provide plenty of documentation about your income and assets when applying for a home mortgage. You also want to have the best credit possible since many mortgage lenders expect you to have a credit score of at least 720 to qualify for the best mortgage rates.

Report shows African-Americans, Latinos are less likely to receive mortgages

February 24th, 2011

African-Americans and Latinos are less likely to receive mortgage loans as the housing crisis has deepened, according to a recent report from ComplianceTech, a provider of technology and mortgage data analysis for government agencies, nonprofits and financial institutions. The analysis of data from 2004 to 2009 shows that there are disparities in the availability of mortgage credit to African-Americans and Latinos. Members of these groups have more difficulty financing a home regardless of whether they are new home buyers or homeowners looking to refinance.

The sub-prime mortgage crisis

The analysis also debunks the erroneous notion that mortgage lending to minorities was at the root of the sub-prime mortgage crisis. Data in the report show that whites actually received the highest number and dollar volume of sub-prime mortgage loans, and are likely to have more mortgage loans in foreclosure. Whites received 4.1 million sub-prime mortgages between 2004 and 2009, Latinos 1.3 million, African-Americans 1.2 million and Asians 179,000.

The report states:

As the foreclosure crisis threatens the financial stability and mobility of families across the country, it will be particularly devastating to African American and Latino families, who already lag behind their white counterparts in terms of income, wealth and educational attainment. Furthermore, the indirect losses in wealth that result from foreclosures as a result of depreciation to nearby properties will disproportionately impact communities of color.Fewer prime mortgages

African-Americans and Latinos have lower origination rates and higher costs when they are approved for mortgages. Between 2004 and 2009 the market share of prime rate mortgage loans for African-Americans fell 62.67 percent and 61.62 percent for Latinos. The market share of prime rate mortgages grew 12.54 percent for whites and 19.6 percent for Asians.

All racial groups experienced a decline in the volume of prime mortgage loans. African-American prime loan volume plunged to $19.5 billion in 2008 from $82 billion in 2004. Latino prime mortgage loan volume fell to $40.2 billion in 2009 from $171 billion in 2004. Prime mortgage loan volume for whites fell to $876 billion in 2009 from $1.2 trillion in 2004, while Asians saw loan volume decline to $90.6 billion in 2009 from $121 billion in 2004. However, white and Asian borrowers saw increases in prime loan volume between 2008 and 2009, while African-Americans and Latinos experienced declines.

Using a cash windfall as a down payment on a home

February 18th, 2011

Should you use an inheritance or other cash windfall as a down payment on a home? Obviously, the more money you have for a down payment the better. But is getting a mortgage loan to buy a home the best use of your money at this time?

Do you have a lot of debt?

Owning a home is part of the American dream. But it can be easy to rush into home ownership without really being ready for all the financial responsibilities. For instance, many people apply for mortgage loans even though they have a lot of credit card debt, auto loans, student loans and other bills. Take a careful inventory of your finances and decide whether it makes more sense to use a cash windfall to pay off some of your debt, especially high-interest debt like credit cards.

Do you have emergency savings?

Owning a home means that you’ll be responsible for all maintenance and repair costs. It is not a good idea to purchase a home without having money set aside in savings for routine maintenance and other projects that may come up. It is also important to have money in savings for other emergencies that may occur, such as car repairs, medical expenses or a sudden drop in income. If you have little or no money saved up, you may be better off using your windfall to boost savings.

Do you anticipate a large expense soon?

Are you about to send your kid to college or anticipating some other important event that will cost big bucks? Put together a spending strategy that prioritizes future expenses. As you go through the numbers it may become apparent that this is not the time to get a mortgage to buy a home. You also may find that you need to put together a budget so that you can take care of your financial obligations and still save up for buying a place in the future.

Take time to plan ahead

Avoid rushing into home ownership even if you can qualify for a home mortgage. Too many Americans have made the mistake of getting mortgage loans when they really could not afford them. If you need help knocking out debt and building up a savings, get help from a debt counselor. If you do receive a windfall for a significant amount, a knowledgeable financial adviser can help you figure out the best way to handle it.

Getting rid of a troubled home loan

February 11th, 2011

Are you desperate to get rid of your mortgage problems? You are not alone. Zillow recently reported that 27 percent of U.S. homeowners are underwater on mortgage loans. There also were 261,333 foreclosure filings in January, according to RealtyTrac.

But homeowners dealing with foreclosure and underwater home loans aren’t the only one struggling. Some borrowers are struggling to make monthly mortgage payments due to a drop in income, job layoff, illness or some other factor beyond their control. There is no easy solution to dealing with mortgage problems, but there are several options to consider.

Sell your home

Getting rid of a mortgage loan is the best option if you really can’t afford to make the payments. Just because you sell the property you currently live in doesn’t mean you won’t be able to purchase another home in the future. Find out what’s going on in your neighborhood in terms of home sales. If there have been a lot of foreclosures, the value of your home is likely to be affected. But even if you are underwater on a mortgage loan that doesn’t mean you have to give up the idea of selling. But you may have to consider a short sale.

A short sale occurs when the mortgage lender agrees to accept a lower payoff that what you owe on a home loan. The advantage to doing a short sale is that the lender can recover some of what’s owed. You would be able to get out from under a troubled loan and avoid foreclosure. Keep in mind that any mortgage debt that is forgiven by the mortgage lender in such a deal may be taxable, so it’s important to consult with a tax advisor.

Mortgage refinancing

Maybe you are feeling pinched by monthly mortgage payments, but things haven’t gotten so serious that you are about to lose you home. If you still have some home equity and good credit, you might qualify for a mortgage refinance. The more equity you have and the higher your credit score the better. Refinancing could be the right move it you are paying interest that is much higher than current mortgage rates. A mortgage payment calculator can help determine how much money you could actually save by refinancing.

These are just a few ways to get out from under expensive mortgage payments. There may be other solutions that suit your financial needs. Talk with your mortgage lender or a housing counselor to learn more about your options.

A quarter of Nevadans who lost homes strategically defaulted

January 28th, 2011

Almost a quarter of Nevada residents who lost their homes to foreclosure walked away from them. A Nevada Association of Realtors (NVAR) Report found that 23 percent of homeowners strategically defaulted on mortgage loans. The report also found that most Nevadans facing foreclosure did not know about federal and nonprofit programs designed to help them.

Many of the people who went through foreclosure had experience at least two “life-altering events” that increase their risk of defaulting on a home mortgage. Losing a job and medical expenses were the most common events that triggered a foreclosure. Also, 46 percent of homeowners blamed banks and lenders for foreclosures, 20 percent blamed the government and 13 percent blamed homeowners.

Residents don’t know where to turn for help

Nevada has consistently had one of the highest rates of foreclosure in the U.S. With so much attention given to foreclosure during the housing crisis, it seems surprising that so many homeowners would be unaware of programs that can help them.

Linda Rheinberger, 2010 NVAR president, said in a statement:

“We think this research will help the public, the real estate industry, lawmakers and others grappling with this difficult issue. Personally, it was striking to see that nearly one in four Nevadans who lost homes to foreclosure admitted that they simply walked away from their mortgage. As for solutions, there may not be a single cure-all, but this report suggests that we can do more to make distressed homeowners aware of the free and low-cost resources available to them.”

Arranging a short sale

Among the alternatives to foreclosure is arranging a short sale. A short sale occurs when a mortgage lender agrees to allow you to sell a home for less than what is owed on a mortgage loan. The mortgage lender is able to recover some of the mortgage loan, and you, the homeowner, get out from under the burden of a mortgage you can’t afford.

US home prices dropped 4.1 percent in 2010

January 7th, 2011

U.S. home prices fell 4.1 percent in 2010, according to a report from Clear Capital. The provider of data services for the real estate industry also said that home prices dropped in 70 percent of major markets, pressured by high unemployment and REO saturation above 22 percent during the year. REO saturation is the proportion of homes that are sold as bank-owned.

Is there a recovery?

Dr. Alex Villacorta, senior statistician with Clear Capital, said in a statement:

Some housing markets are well on their way to recovery, while others are experiencing a renewed downturn reminiscent of the housing crash only two years ago. Understanding which path a given market is likely to follow is dependent on several key factors, but the two clear drivers are local unemployment rates and the prevalence of distressed homes.

Housing markets change

Only eight major markets experienced double digit declines during the year, indicating that rapid and severe declines are subsiding. Those markets were Dayton, Ohio; Columbus, Ohio; Milwaukee, Wis.; Tucson, Ariz.; New Haven, Conn.; Jacksonville, Fla.; Virginia Beach, Va.; and Richmond, Va.

Of the 15 major markets that had price gains, six were in California, a state that has been hit hard by the housing crisis and had a lot of homeowners default on mortgage loans. Those markets were Riverside, San Diego, Los Angeles, San Jose, San Francisco, and Fresno.

Home mortgage applications

Some housing markets were lifted by home buyers taking advantage of a government tax credit. The tax credit encouraged many people to apply for mortgages while interest rates were at or near historical lows. Without the tax credit some homeowners may not have enough money saved up for a mortgage loan down payment and may put off buying a house.

Markets expected to continue struggling

The clear Capital data indicates that housing markets in the West may continue to struggle this year, and that Arizona may post double digit declines. Major Arizona cities have unemployment below the national average, but REO saturation in Tucson is more than 12 percentage points above the national level and more than 19 percentage points for Phoenix.

California markets that improved this year and posted gains may not experience that again this year. Also, housing markets in the South also are expected to struggle, with four of the 10 worst declining markets being in that region.

Mortgage fraud: suspicious activity on the rise in 2010

December 23rd, 2010

Mortgage loan fraud suspicious activity reports (SARs) rose 7 percent in the first half of 2010 to 35,135 from 32,926 a year earlier, according to the Financial Crimes Enforcement Network (FinCEN). The rise in the number of reports is partly due to “increased attention to older loans spurred by repurchase demands.”

“SARs are one of the most important sources of lead information for mortgage fraud investigations available to law enforcement,” FinCEN Director James H. Freis, Jr. said in a statement. “As a member of the President’s Financial Fraud Enforcement Task Force, FinCEN remains active with law enforcement and other partner agencies in the task force to provide lead information and to identify potential abuses in order to combat mortgage loan fraud.”

Spotting a home loan scam

Mortgage fraud is perpetrated through a variety of schemes. Among the types of fraud that could occur are:

  • Flopping, which is a flipping scheme that occurs when a foreclosed property is sold at an artificially low price to a straw buyer, who turns around and sells it at a higher price and keeps the difference.
  • Submitting fraudulent home loan documents to mortgage lenders. In some cases dishonest mortgage professionals may submit phony documents that inflate the salaries and assets of borrowers.
  • Inflating home appraisals to qualify for mortgage loans
  • Foreclosure rescue scams that target homeowners who are having trouble making mortgage payments

What should you do?

Mortgage fraud can steal your money and your sense of security. That’s why it’s important to take steps to guard against becoming a victim. Among the things you can do to protect yourself are:

  • Get referrals for real estate and mortgage professionals from trustworthy friends and family members
  • Never sign documents that you have not read and do not understand
  • Use a reputable attorney to review all the documents and terms of your transaction
  • Check to make sure that all documents have information that is correct
  • Make sure that a comprehensive title search has been done on the property
  • Be skeptical of real estate professionals who require you to use specific mortgage lenders or home appraisers

Senior citizens are often vulnerable to scams. If you have an elderly relative who seems to be caught up in a troublesome financial transaction, try to find out as much information as you can to determine if they are being scammed.

Mortgage rates are up so should you apply for a loan now?

December 17th, 2010

Mortgage rates have risen over the past few weeks, contributing to a decline in mortgage applications. The average rate on a 30-year fixed mortgage was 4.83 percent this week, compared with 4.61 percent last week, according to Freddie Mac. This rate was 4.17 percent in November, the lowest point recorded by Freddie Mac since it began tracking rates in 1970.

Historical mortgage rates

Have you been dragging your fee about applying for a mortgage refinance or a loan to purchase a home? If so, don’t panic. While mortgage rates have risen during the past few weeks they are still near historic lows. For instance, if you had applied for a mortgage in October 1981, 30-year fixed-rate mortgages were averaging 18.45 percent, according to HSH Associates. Even as recently as 2008, mortgage rates rose above 6 percent.

Improve your profile as a borrower

Mortgage rates can change at any time, but that’s no reason not to shop around to find a good deal. Take steps now to make yourself a more attractive candidate for refinancing or a new home loan. Use the following tips to improve the chance of getting a mortgage:

  • Clean up your credit. Read your credit reports to find inaccurate or outdated information. Contact the credit reporting agency and creditors to clear up any mistakes. Do not wait until you are about to apply for a mortgage loan to do this.
  • Pay off as much debt as possible. Not only do credit cards have high interest, but having too much debt from them can keep you from getting approved for mortgage refinancing or a loan to purchase a property. The less high-interest debt you have, the more income you can put toward monthly mortgage payments.
  • Save as much as possible. Whether you are trying to refinance or buy a home, your ability to bring more cash to the closing can improve your chances of getting a loan. When buying a property, the larger the down payment, the less your monthly payments on a mortgage. If you are refinancing, bringing cash to closing–a cash-in refinance–can boost your home equity, making you a more attractive loan candidate to mortgage lenders.

Shop for mortgage deals

Mortgage rates may continue to climb, or they may fall again. You can’t time the market, so it’s not really worth it to try. If you really want to get a home loan to purchase a property or refinance, go ahead and do what you need to do to qualify for the best loan.