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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.

Is now the time for mortgage refinancing?

August 8th, 2012

On Aug. 2, Freddie Mac revealed in a press release that most mortgage rates had risen slightly during the week leading up to that date. Normally, that would be of little surprise as home loan rates usually bob up and down. However, with rates having fallen or remained at record lows in 13 of the previous 14 weeks, analysts are likely asking themselves: “Is this a bottoming-out? Is the long-predicted rise in rates finally happening?”

Predicting mortgage rates accurately is difficult

It could be months — possibly even years — before they have a definitive answer to that question. In recent years, we’ve seen mortgage rates rise slightly only to fall again to new record lows, the last of which was observed only a week before Freddie Mac’s press release.

The press release showed that current mortgage rates for 30-year fixed-rate mortgages (FRMs) averaged 3.55 percent with 0.7 points that week. At the same time last year, that same rate was 4.39 percent. Back then, even that was seen as unsustainable, and most commentators were predicting significant rises.

Case in point, in its August 2011 Mortgage Finance Forecast, the Mortgage Bankers Association (MBA) predicted that 30-year FRM rates in Q3 (the third quarter of 2012) would average 5.1 percent. The MBA wasn’t alone. Most others thought that was a realistic expectation as well.

Watch trends to time mortgage refinancing decisions

If expert economists specializing in forecasting mortgage rates can get things so spectacularly wrong, what chance do ordinary homeowners have of judging the right time to refinance? The short answer is that choosing the right moment seems to have more to do with luck than judgment.

However, that shouldn’t be an excuse for not refinancing. Those who were reluctant to refinance over the last three or four years because they weren’t absolutely sure they would get the very best deal would, today, probably find themselves thousands of dollars worse off had they acted at almost any time during that period. They were better off for having waited.

Small wonder, then, that the MBA reported August 1 that refinances represented 81 percent of all new home loan activity during weekending July 27. None of those people could be certain that mortgage refinancing rates wouldn’t fall yet again, but they took the chance anyway — and it’s a choice many commentators would regard as very sensible.

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.

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.

Cash-in refinances break record in 4th quarter

February 3rd, 2011

More homeowners than ever paid down mortgage loan balances while refinancing their homes in the fourth-quarter of 2010, according to Freddie Mac. During the period, 46 percent of homeowners who refinanced mortgages brought cash to closing to lower their principal balance. That is the highest “cash-in” share since Freddie Mac began tracking refinance activity in 1985.

Paying down mortgages and other debt

Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement:

Consumers are generally shedding debt, and mortgages are just another way they’re doing it. Between 2007 and the third quarter of 2010, mortgage debt declined more than $400 billion, according to the Fed. The estimated volume of net equity cashed out in our report do not account for the homeowners who have paid off their mortgages in their entirety.

Cash-out refinancing

Freddie Mac also reported that the percent of cash-out refinances, in which homeowners cashed out some home equity, fell to a record low. Borrowers who increased their mortgage loan balance by at least 5 percent accounted for 16 percent of mortgage refinancing. The cash-out refinance share has averaged 62 percent over the past 25 years.

Getting a cash-out refinance deal has gotten tougher for many borrowers as the housing crisis has dragged on. Lower home values, high unemployment and tougher lending standards all have put the brakes on the my-house-is-a-piggy-bank mentality that swept America before the housing downturn.

Taking advantage of low mortgage rates

Some savvy homeowners who still have good credit have can use current market conditions to their advantage. Instead of using low mortgage rates to simply lower monthly payments, you can choose to also reduce the amount of principal being refinanced by bringing cash to closing. This strategy can give you a choice of making the new lower payments or continuing to pay down your mortgage faster by sticking with the higher payments you made before refinancing. Either way you end up paying out less interest over the life of the mortgage loan.

When shopping around to compare mortgage loans, let lenders know that you are interest in bring cash to closing to pay down the principal. This could work in your favor and allow you to get a better mortgage rate. Bring cash to closing also could push up your home equity enough to get rid of monthly mortgage insurance (MI) payments.

Government to Help Housing Markets Suffering the Most

February 19th, 2010

People struggling with mortgage loans in five states are getting additional aid to get them through the housing crisis. President Obama said the government plans to give $1.5 billion to local and state housing agencies in an effort to help troubled homeowners.

Help for Troubled Mortgage Loans

Funds are to go to agencies in Nevada, California, Arizona, Florida, and Michgan, states hit hardest by the housing downturn. Those states have seen housing prices plunge more than 20% from their peak.

Money can be used in various ways, including modifying home loans that are underwater or helping unemployed people struggling with mortgages to avoid foreclosure. Housing agencies can also use the aid for “programs encouraging sustainable and affordable homeownership,” according to the White House blog.

Get Help with Your Mortgage

While these programs should help many troubled homeowners, you may need to look for relief sooner than that. Contact your mortgage lender or loan servicer if you are already behind on monthly payments. You may be eligible for a mortgage refinance or loan modification.

Refinance Mortgage

Mortgage refinancing through the government’s program requires:

  • Your mortgage loan to be guaranteed by Fannie Mae or Freddie Mac
  • You to be current on mortgage payments
  • The ability to make payments on the refinanced home loan
  • You to be the owner-occupant of a one- to four-family home

If you don’t have a home mortgage guaranteed by Fannie Mae of Freddie Mac, don’t assume that your mortgage lender can’t help you. They may have some other program to help you do a mortgage refinance.

Mortgage Loan Modification

Getting approved for a home loan modification through the government’s program requires:

  • Your mortgage payment (including taxes and insurance) to be greater than 31% of your monthly gross income
  • You must be able to document financial hardship that is keeping you from affording your mortgage payment
  • Have a first lien that originated before Jan. 1, 2009

If you are facing foreclosure, mortgage loan servicers can’t proceed with a foreclosure sale until you’ve been evaluated for help through the mortgage loan modification program.

Contact Mortgage Lender

The most important takeaway is that you must be proactive about getting help with your mortgage loan. Ducking and dodging phone calls and letters from your mortgage lender isn’t going to help your situation. Be diligent about tracking down someone at your mortgage lender who is authorized to set up some kind of deal to get back on track with your home loan.

Mortgage Loan Modifications Fall Short of Goals

December 11th, 2009

I recently wrote about how more than 650,000 home mortgages had been modified this year through October because of the government’s foreclosure prevention plan. That number increased to more than 697,000 mortgage loans through November, but most of them were only trial modifications, according to Bloomberg. 

Permanent Mortgage Loan Modifications

Although the Making Home Affordable program aimed to help 4 million distressed homeowners, only 31,382 mortgages have actually been permanently modified, according to the Treasury Department. GMAC Mortgage Inc., JPMorgan Chase & Co., and Ocwen Financial Corp. completed the most mortgage loan modifications.

What’s Holding up the Process?

Home loan modifications have been affected by a variety of factors. The Obama administration has said that about a third of borrowers failed to provide proper proper documentation to get their mortgage loans modified permanently. Loan servicers also have dropped the ball in many cases. Some loan servicers have lost documents submitted by borrowers or not requested the appropriate documents.

Putting Pressure on Mortgage Lenders

The Treasury Department is stepping up pressure on mortgage lenders to get more loans permanently modified. In the meantime, more homeowners are falling behind on mortgage payments. About 7.9 million homeowners got behind on mortgage payments in the third quarter, according to the Mortgage Bankers Association.

Do Mortgage Modifications Have Poor Outlook?

Laurie Goodman, senior managing director of Amhert Securities Group LP, told Congress last week that the mortgage loan modification program is “destined to fail” because it doesn’t address the fact that so many homeowners have negative equity in their homes.

About a quarter of U.S homeowners have negative equity in their homes. That means they owe more on their mortgages than their homes are worth. Previously, estimates had put the number of homeowners with negative equity at around 32%.

Refinance Mortgage

Mortgage loan modifications obviously don’t work for everyone. But if you still need help lowering your monthly mortgage payments, consider mortgage refinancing. Contact your loan servicer to see if you qualify to refinance your mortgage through the Making Home Affordable program. To get refinancing through the government’s program you must be current on monthly payments and have a home loan that isn’t higher than 125% of your home’s value.

If you don’t qualify for that program, search for refinancing deals from mortgage lenders here.

How Appraisals Affect Mortgage Loans

October 30th, 2009

So you’re ready to get a home loan or refinance and want to know how large of a mortgage you can get. That depends on several factors, including the home appraisal. The following guide shows how an appraisal affects the amount of your mortgage loan.

What Is an Appraisal?

An appraisal gives an estimate of what a home is worth. When you apply for a home loan the mortgage lender usually orders up an appraisal and chooses the company to do it. The cost of the appraisal is included in your closing costs, and you are entitled to a copy of the appraisal.

If you already have a mortgage and are thinking of refinancing, you can get your own appraisal to get an idea of what your home is worth. But your mortgage lender is under no obligation to use that report.

Declining Home Values

The appraiser does a comparitive market analysis of recent home sales in your area. He or she also looks at the condition of your property and how much it would cost to rebuild it.

Because so many people have seen their home values plummet during this recession, it can be tough for them to get a large enough appraisal to qualify for a mortgage refinance or new home loan. In many cases homeowners are “upside down” on their loans, or owe more on a mortgage than their house is currently worth. If that happens, you may be denied a mortgage loan.

If the house appraises for less than you expected, you may be asked to make a larger down payment. If you’re buying a home the mortgage lender may even ask you to go back to the seller to renegotiate the sale price. 

Reasons Appraisal May Be Low

There are various reasons an appraisal may come in lower than your expected, including:

  •  Your neighborhood may have a lot of foreclosures, which could affect your home value
  • The underwriter could have evaluated the home incorrectly
  • The seller may have overpriced the house
  • The appraiser may not have much experience

You can always appeal an appraisal, but there is no guarantee of it getting changed. If your mortgage lender won’t budge, you may be unable to refinance or obtain the mortgage loan you need to buy a home.

8 Mistakes to Avoid When Refinancing a Mortgage Loan

August 7th, 2009

A mortgage refinance can lower your monthly payments and decrease the amount of interest paid over the life of your home loan. But don’t just focus on mortgage rates without understanding everything involved with a refinance. Here are eight mistakes to avoid when refinancing a mortgage.

  1. Not shopping around for mortgages is a huge mistake. It’s imperative that you compare different deals to make sure you get the loan package that is right for your situation. Not all mortgage refinancing is the same so slow down and take your time. Read the rest of this entry »