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Paying the House Off in 15 Years

From the Wall St. Journal.

"What's prompting the shift to shorter loans? Historically low interest rates for fixed-rate mortgages.

Homeowners are doing the math and realizing that rates have fallen enough so the increase in payment between a new 15-year mortgage and their current loan is no longer unbearable for their budgets, says Bob Walters, chief economist at online lender Quicken Loans."

...

"The financial situation of those capable of refinancing today is a factor in the shift, Mr. Walters says. These people typically are homeowners with the best credit and the most equity -- and, therefore, most suited for a shorter-term loan."

...

"A 15-year mortgage also acts as somewhat of a forced savings account for homeowners, says Leif Thomsen, chief executive of Mortgage Master, a privately owned lender, given that the higher payments help a borrower pay down the principal at a quicker clip."

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"Borrowers...who are worried about future loss of income, might be better served taking a longer-term mortgage but making extra payments on the principal to pay off the loan faster, says Mr. Walters.

For instance, if you refinance a $200,000 mortgage into a 30-year loan with a 4.5% rate, and then apply $100 of the savings to the principal payment each month, you'd save $31,700 in interest over the life of the loan, Ms. Cutts says. And you would pay off the mortgage in 25 years, instead of 30, she adds."

Take a good long look at your amortization schedule (available at your bank if you didn't receive one at closing)--you'll notice the principal part of the mortgage payment is cheap compared to the interest each month. Using the Charles Givens mortgage snowball method (p. 121), you could make your own 15-year mortgage with less pain and suffering. It's faster and cheaper than a biweekly mortgage or a 15-year mortgage, and you can elect to skip months if money is tight.

To speed up the payment process, you may also elect to pay more than one of the advance principal payments, since they are so cheap at the beginning of the mortgage--as long as the bank receives them by the end of the month.

By paying your CURRENT mortgage payment, PLUS the next two months' worth of principal EACH MONTH, you turn a 30-year mortgage into a 10-year one without all the hassle, fees, and closing costs of a refi NO MATTER WHAT YOUR INTEREST RATE IS. Lower rates from the start would be beneficial, I admit, but we can't all have a perfect world.

Now if we all could get an amortization schedule for our CREDIT CARDS...

Posted by Cute at 7:20 PM

Labels: financial (non-tax), taxes