15-Year Fixed vs. 30-Year Fixed: The Pros and Cons

It’s that time again, where I take a look at a pair of popular mortgage programs to determine which may better suit certain situations. Today’s match-up: “15-year fixed mortgage vs. 30-year fixed mortgage.” As always, there is no one-size-fits-all solution because everyone is different and may have varying real estate and financial goals. For example, [&hellip

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Source: thetruthaboutmortgage.com

10 Mortgage Lenders to Consider for the Best Mortgage Rates (and Fees!)

Everyone likes a discount, right, even if it’s on a small one-time purchase that equates to a nominal amount. For one reason or another, it just feels like a win. It’s obviously even sweeter if you get a discount on a big-ticket item, as the savings will be much larger. Better yet, how about a [&hellip

The post 10 Mortgage Lenders to Consider for the Best Mortgage Rates (and Fees!) first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

What Is a Streamline Refinance?

Mortgage Q&A: “What is a streamline refinance?” While qualifying for a mortgage refinance is generally a lot harder than it has been in the past (now that lenders actually care how your home loan performs), there are less cumbersome options available. In fact, many lenders offer “streamlined” alternatives to existing homeowners to lower costs and [&hellip

The post What Is a Streamline Refinance? first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

Why Are Refinance Rates Higher?

Mortgage Q&A: “Why are refinance rates higher?” If you’ve been comparing mortgage rates lately in an effort to save some money on your home loan, you may have noticed that refinance rates are higher than purchase loan rates. This seems to be the case for a lot of big banks out there, including Chase, Citi, [&hellip

The post Why Are Refinance Rates Higher? first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

Don’t Let Your Current Lender Talk You Out of a Mortgage Refinance

What I’ve seen and heard through the years is certain lenders not being so forthcoming with existing customers wanting to refinance their mortgage. For example, when a homeowner goes to inquire about the “awesome low rates,” their first instinct may be to pick up the phone and call the lender who gave them their current [&hellip

The post Don’t Let Your Current Lender Talk You Out of a Mortgage Refinance first appeared on The Truth About Mortgage.

Source: thetruthaboutmortgage.com

An Alternative to Paying Mortgage Points

An Alternative to Paying Mortgage Points

If and when you take out a mortgage, you’ll be faced with an important choice. To pay or not pay mortgage points.

In short, those who pay points should hypothetically secure a lower interest rate than those who do not pay points, all else being equal.

That’s because mortgage points, at least the ones that are bona fide discount points, are just a form of prepaid interest.

So you’re essentially paying a portion of the interest on the underlying loan upfront, as opposed to monthly over the life of the loan term.

The caveat is that it is possible for a home buyer or refinancer to obtain a lower mortgage rate than another borrower without paying any points, assuming they shop around and use a mortgage lender with lower rates.

Now back to whether you should pay points or not, especially at a time when mortgage rates continue to hit new all-time lows.

Mortgage Rates Have Hit Record Lows 12 Times This Year

In an environment where mortgage rates are declining over a long period of time, paying mortgage points can be a mug’s game.

After all, you paid money upfront for a lower mortgage rate, only to find yourself back at the refinancing table. No bueno.

Indeed, many homeowners these days are asking the question, how soon can I refinance again?

Those who went the no cost refinance route have basically nothing to lose, other than maybe resetting the mortgage clock.

While those who paid several thousand dollars in closing costs, of which points made up the lion’s share, potentially have a lot to lose if they take out a new home loan right away.

Paying Points vs. Paying a Little Extra Monthly

$400,000 Loan Amount Pay Points Pay Extra Monthly
Upfront Cost of Points $4,000 $0
Mortgage Rate 2.5% 2.75%
Monthly Payment $1,580 $1,680
Extra Payment $0 $47
Loan Balance After 48 Months $362,324 $361,316
Total Paid After 48 Months $79,840 $80,640
Net Savings $208

Let’s consider a $400,000 loan amount where a borrower pays one discount point to obtain a rate of 2.5% on a 30-year fixed mortgage.

And an alternative where the homeowner decides not to pay any points and settles for a rate of 2.75% instead.

The homeowner who paid $4,000 upfront would enjoy a monthly payment of about $1,580 versus the higher payment of $1,633 for the no-points borrower.

That’s a difference of about $53 per month, which would take around four years to recoup when you consider the lower-rate mortgage reduces the outstanding principal balance faster.

Now if you didn’t want to pay that extra $4,000 at closing, you could simply go with the higher mortgage rate but still wind up with a similar mortgage balance after four years.

Simply pay $47 extra each month ($1,680 total) and your remaining loan balance would be around $361,316 after 48 months.

Meanwhile, the cheaper mortgage would be roughly $362,324 at that time with regular monthly payments.

That’s about a $1,000 difference for an extra $4,800 in payments over that time ($100 x 48). So the net cost is $3,800 over that time, slightly lower than the $4,000 paid upfront.

In the end, both borrowers are in a similar spot after four years, but the borrower who didn’t pay points had the option to refinance if rates moved even lower.

And they could pay extra each month to stay on track or just pay the minimum and invest the money elsewhere at hopefully a higher return.

Now, after those first four years are up, the math will start to benefit the homeowner who opted for the lower-rate mortgage in exchange for upfront points.

But how many homeowners are actually keeping their mortgage (or house) that long? Lately, not many.

In summary, this is just an inverse way of looking at buying mortgage points, which illustrates how those who don’t stick around for a long time can actually benefit from not paying points.

The counterargument is that rates are at record lows and will likely only go up from here, so if you can lock an even lower one in today, why not?

But we thought they had hit rock bottom years ago, only for them to defy the odds over and over again.

And as I mentioned, a borrower who actually takes the time to comparison shop could enjoy the best of both worlds.

[Watch out for low mortgage rates you have to pay for!]

Benefits of Not Paying Mortgage Points

  • You basically get flexibility versus a non-refundable upfront payment
  • Can refinance to a lower rate without worry at any time
  • Can sell your property whenever you want without leaving money on the table
  • Can still save on interest and reduce the loan term simply by paying extra each month
  • Gives you the option either way if you stay with the mortgage/property longer than planned
Don't let today's rates get away.
About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com

Why Are Mortgage Rates Different?

Why Are Mortgage Rates Different?

Mortgage rate Q&A: “Why are mortgage rates different?”

Why is the sky blue? Why are clouds white? Why won’t your neighbor trim their tree branches?

These are all good questions, and ones that often puzzle even the most savvy of human beings.

First things first, take a look at how mortgage rates are determined to better understand how banks and mortgage lenders come up with interest rates to begin with.

From there, you’ll need to consider why mortgage rates are different for consumer A vs. consumer B.

No One Size Fits All for Mortgage Rates

why mortgage rates different

  • Mortgages are kind of like snowflakes in that no two are exactly the same (not really)
  • The subject property and the borrower will always have unique characteristics
  • As such risk on the underlying loan will vary and so too will the interest rate received
  • Lenders also price their mortgages differently so even identical scenarios can result in variable pricing

Mortgages are complicated business, and there certainly isn’t a one-size-fits-all approach in this industry.

First off, there are thousands of different banks, lenders, and credit unions that offer home loans, some of them entirely unique and proprietary.

These companies compete with one another to offer the lowest rate and/or the best customer service.

The well-known names might offer higher rates in exchange for their perceived trust and familiarity.

Meanwhile, the smaller guys might offer rock-bottom rates to simply stay in contention with the big players.

Along with that, every loan scenario is different (just like a snowflake), and must be priced accordingly to factor in mortgage default risk (risk-based pricing).

Simply put, the higher the risk of default, the higher the mortgage rate. But that’s just the tip of the iceberg.

There also promotional rates, such as mortgage rates that end in .99%, and innovative marketing products like UWM’s Exact Rate that lets brokers offer strange rate combinations, including 2.541% or 2.873%.

So the possibilities truly are endless these days when it comes to different mortgage rates.

Mortgage Rates Vary Based on the Loan Criteria

  • Mortgage lenders make a lot of assumptions when advertising rates
  • Your particular loan scenario may be quite different than their hypothetical loan
  • You have to take into account the many pricing adjustments applicable to your mortgage if it doesn’t fit inside that box
  • These adjustments have the potential to greatly increase or decrease your interest rate

Mortgage rates don’t exist in a bubble – the parts affect the whole.

Banks and lenders start with a base interest rate (par rate) and then either raise it or lower it (rarely) based on the home loan’s criteria.

There are loan pricing adjustments for all types of stuff, including:

· Loan amount (conforming or jumbo)
· Documentation (full, stated, etc.)
· Credit score
· Occupancy (primary, vacation, investment)
· Loan Purpose (purchase or refinance)
· Debt-to-Income Ratio
· Property Type (single-family home, condo, multi-unit)
· Loan-to-value / Combined loan-to-value

The more you’ve “got going on,” the higher your mortgage rate will be. And vice versa.

In short, an individual purchasing a single-family home with a conforming loan amount, 20% down payment, and a 800 FICO score will likely qualify for the lowest rates available.

Conversely, the individual requesting cash out on a four-unit investment property with a 640 FICO score will likely be subject to a much higher rate, assuming they even qualify.

And again, rates will vary from lender to lender, so it’s a multi-layered situation.

I’ve already covered a few related topics, including why mortgage rates rates are higher for condos and investment properties.

Mortgage rates also tend to be higher on jumbo loans and refinance transactions, especially those involving cash-out.

Advertised Mortgage Rates Are Best Case Scenario

  • Mortgage rates on TV and online are usually best-case scenario
  • They are intended to be super attractive to lure you in and snag your business
  • When the dust settles your interest rate might look nothing like what you saw advertised
  • This is why it’s important to shop around and better understand how risky your particular loan is

You know those mortgage rates you see on TV or on the Internet?

Those assume you’ve got an owner-occupied single family home, a perfect credit score, a huge down payment, and a conforming loan amount.

Not to mention a newborn golden retriever with an unmatched pedigree.

Most people don’t have all those things, and as a result, they’ll see different mortgage rates. And by “different,” I mean higher.

How much higher depends on all the factors listed above.  So take the advertised rates you see with a huge grain of salt.

Also, take the time to shop your home loan with different lenders, and in the process, get to better understand your risk.

Find out what lenders are docking you for and take steps to fix those things if you want the lowest rates available.

Do Mortgage Rates Vary By State?

  • Yes, they sure can! You might get a lower rate in California vs. Nebraska
  • Depending on lender appetite for a certain geographic region
  • Rates may vary from state to state, or even in certain counties
  • Make sure the lender you use offers the best pricing for the state in which you reside

One last thing. I’ve been asked if mortgage rates can vary from state to state, and the answer is actually YES. In fact, they can even vary by county in some cases.

As you can see from the image below, some states tend to have lower average mortgage rates for one reason or another.

States Lowest Average Mortgage Rates

This list is from February 2019, when the average rate for the 30-year fixed was 4.84% nationwide, per LendingTree.

While no state offered an average rate below 4.74% or above 4.96% (pretty narrow range), there was some divergence by locality.

California led the nation with an average rate of 4.74%, followed closely by the 4.75% average seen in New Jersey and the 4.76% average found in both Washington and Massachusetts.

Nothing earth-shattering, but still different nonetheless.

But it might not be for any one reason, such as a higher default rate in state X or fewer natural disasters in state Y. Or more regulations in another state.

It could be more to do with the fact that lenders want to increase their business in a certain part of the country, and thus they’ll offer some sort of pricing special or incentive to drive rates down in say California.

So you might see a rate sheet that says .50% rebate state adjustment for loans in CA and FL, for example. This will give them a competitive advantage in those regions.

How about states where mortgage rates tend to be slightly higher, such as New York, Iowa, and Arkansas, which averaged 4.96%, 4.93%, and 4.92%, respectively?

States Highest Average Mortgage Rates

It’s possible you might see a pricing adjustment of say .25% for one of these states that may drive the interest rate up somewhat.

In other words, rates can be priced both higher or lower depending on the state where the property is located.

Of course, if this results in unfavorable pricing you can just move on to a different lender that doesn’t charge more for the state in question.

All the more reason to shop around, compare mortgage rates online, and speak with a mortgage broker or two.

Once you’ve done that, check mortgage rates with your local bank or credit union as well.

Don’t be one of the many who obtain just one mortgage quote because you may wind up paying too much.

Read more: What mortgage rate can I expect?

Don't let today's rates get away.

Source: thetruthaboutmortgage.com

How to Move Out of Your Parents House

How to Move Out of Your Parents House

There’s nothing inherently wrong with living with your parents, other than EVERYTHING! So let’s talk about how to GET OUT!

To be clear, I’m going to discuss moving out and buying a place of your own, not moving out and renting, seeing that the latter is fairly self-explanatory.

The desire to move out might be especially strong right now given that we’re in a pandemic and everyone is home, all of the time.

But don’t just make a home purchase on a whim, really take the time to think it through, especially since home prices aren’t very cheap.

Living with Your Parents Is a Great Launchpad

how to move out

  • Live rent-free and save up money
  • Establish employment history (2+ years is generally good)
  • Pay off other debt like student loans, credit cards, etc.
  • Work on your credit scores and bolster your credit history
  • Study how real estate and mortgages work
  • Determine if and where you want to buy a property

While it might not be cool now or ever, living with your parents is actually a really good time to get your ducks in a row before applying for a mortgage. You may be able to save up some serious dough in the process too.

You generally don’t need rental history to qualify for a mortgage if you’ve been living with your parents, though it can help to pay rent beforehand in terms of avoiding payment shock (going from no monthly payment to a very large one).

It can also be helpful to move out, pay rent, and live on your own a bit to get a better understanding of what it’s like in the real world. And qualifying for a mortgage might be easier if you have documented rental history.

But if you want to go straight from mom and dad’s house to your own house or condo, it’s doable as well.

As I alluded to, it can be a great way to set yourself up for success if you do all the right things while living at home. Let’s talk about some of those right moves.

Establish Your Credit History While at Home

  • Make sure you have 3 open and active tradelines that appear on your credit report
  • This can include credit cards, auto loan/leases, student loans, etc.
  • Should all be open at least 2 years to be beneficial
  • Aim for credit scores of 760+ for best mortgage rates and terms
  • But loan programs are available for much lower credit scores too

One key thing you’ll want to do while living at home is build your credit history. This is very important in terms of qualifying for a mortgage, especially if you don’t have prior rental history.

If you can’t show the loan underwriter you’ve been able to pay rent on time in the past, they’ll at least want to know that you’ve made good on other credit obligations.

This can include credit cards, auto loans/leases, student loans, and so forth. Generally, it’s advised to have at least three of these types of tradelines open and active, with a minimum two-year payment history on each.

For example, if you’ve got two open credit cards and a car lease that have all been open for 24 months or longer, you should be looking good in the credit category.

That’s assuming you’ve been making on-time payments during that entire period. Definitely make sure you’ve got no missed payments!

Note: You don’t need to carry a balance to benefit from these accounts, despite what you might have heard or read. Simply having the accounts open and in good standing is enough.

In fact, if your balances are paid off in full each month, you should have more purchasing power for your eventual mortgage loan. And there’s no need to pay interest to boost your scores.

I’ve already written about credit scores and mortgages, so review that page to learn more if you have additional questions in that department.

Building credit is a somewhat passive activity that happens over time. It’s something you don’t constantly have to worry about as long as you have a few accounts open and in good standing.

But it’s important to get started as early as possible, as it does take time to establish credit history, hence the word “history.”

If you lack rental history and credit history, it’ll just complicate matters when it comes time to apply for a home loan, and it might require you to use a co-signer to get the job done.

Save for a Down Payment While You’re Saving on Rent

  • Consider the down payment needed on the house
  • Cash reserves for future monthly housing payments
  • The closing costs associated with the mortgage
  • The relocation costs once you move out
  • And the costs to furnish your new property

While you’re building your credit in the background, you should be focusing on saving up for a down payment on your new digs.

While there are some no down payment mortgages available, such as VA loans and USDA loans, along with private offerings from credit unions and the like, you should aim to put down at least 3%.

For one, you may not qualify for those zero down programs, and if you’re a first-time home buyer, it can show that you’re adequately prepared for homeownership.

Having more money to put down is also critical in today’s very competitive housing market, with bidding wars all too common. Home sellers won’t be very impressed if you can’t even muster 3% down, and even then, they might pass you by.

When I say 3% down, it’s in reference to the minimum down payment generally required by both Fannie Mae and Freddie Mac to purchase a home.

If you go the FHA loan route, you’ll need a slightly higher 3.5% down payment.

However, it is possible to use gift funds with these loan programs, so technically you could come in with none of your own money and still move out of your parent’s home, assuming someone is willing to help you.

But again, try to strive for better here. Doing the bare minimum isn’t exactly putting your best foot forward. And if you put less down, you’ll wind up with a higher mortgage rate and most likely have to pay mortgage insurance.

It’s also helpful to have money set aside for closing costs (financing a home purchase isn’t without costs) and for reserves. You may need a couple month’s reserves as well to show that you have the ability to make monthly mortgage payments.

While you’re at it, take the time to start running some calculations to determine how much mortgage you can afford based on your income, down payment, and DTI ratio.

Speaking of income, underwriters generally want at least two years of employment history in the same position or line of work.

So if you just got a job last week, that might not be sufficient unless you’re a doctor, dentist, lawyer, or in a similar field that required a lot of training and guaranteed money after the fact.

This is why it might be good to live with your parents while establishing employment history, especially if you don’t have much saved up just yet and don’t want to blow it all on rent.

Run the numbers through a basic mortgage payment calculator to see what a given loan amount will set you back at a certain interest rate, and also consider using a mortgage affordability calculator to really dig in.

Start Familiarizing Yourself with Mortgage & Real Estate

  • Visit websites like mine and others like it to educate yourself
  • Learn the real estate and mortgage lingo
  • Scour listings on Zillow, Redfin, and similar websites/apps
  • Go to open houses to get a better feel for properties in person
  • Formulate your own opinions before speaking to interested parties

These days, there are a lot of great resources available to prospective home buyers, all at your fingertips, literally.

Aside from mortgage qualification, which is very important, it’s vital to get a better understanding of how real estate works, the various types of real estate available to you, how to buy a home, and who to use along the way.

Start scouring individual listings in areas you’re interested in just to get a feel for pricing. Fire up the Redfin and Zillow apps and start creating saved searches and alerts to see what pops up over time.

Then track the listings you care about to see how they turn out. You can see what they were originally listed for and what they eventually sold for, assuming they actually sold.

You can even go to open houses if one is being held (without a real estate agent) and check out the properties to get a really good feel for them.

While you’re there, do not feel obligated to leave your information with the listing agent working the open house. It’s okay to be a lookie loo for now.

There are a lot of so-called disruptors like iBuyers out there trying to change the classic real estate agent model, but it’s still quite likely you’ll use a real estate agent.

Before you even speak to one, it might be advisable to learn on your own and form your own opinions, so someone else doesn’t make them for you.

Check out what the houses, condos and townhomes are like at certain price points in your desired locales. See what features matter to you, and how much square footage you might require.

You can also see design trends and visualize your ideal living space in the process.

The same goes for home loans – at a minimum, learn how mortgages work, where you can get one, and how they differ from other types of loans you might be more familiar with.

For extra credit, take the time to understand how mortgage rates are determined and why.

You could be making mortgage payments for 360 months if you go with a 30-year fixed, so shopping around to get a lower interest rate can really pay dividends.

What Type of Property Do You Want?

  • Do you want a condo, townhouse, or a single-family home
  • Do you have pets and plans to start a family?
  • Do you want to live in the city or the suburbs?
  • What amenities are nearby?
  • What about the schools, crime, etc.?
  • Is this an investment or a forever home?

As you conduct your searches and potentially visit properties, you should make a list of what’s important to you and what’s not.

For example, do you want a condo or a house? If you have a dog or other pets, you might want/need more space.

Do you like city living or suburban living? This isn’t always an option if affordability is an issue, as it’s often a requirement to drive until you qualify to find something suitable.

But consider the work commute if you’ve got one, and really study the area you’re interested in moving to.

Go during the day, go at night, go during the week and on weekends. Get a really good feel for the city in question, and even the street or pocket the properties are located in.

Check out the walkscore and the amenities nearby. Really try to visualize yourself living in a certain area, and not just for a year or two. For several years.

Also consider your goals for the property. Are you buying it as an investment, as a forever home, or have you not even thought that far ahead?

You should have a fairly clear picture in your head of what you want to achieve with the home purchase. If you don’t, maybe take an extra moment to think it all through.

[When to start looking for a home to buy.]

Buying Real Estate Is a Commitment

  • Prepare to stay in the property for at least 5 years
  • Be sure you can afford to make housing payments for the long-haul
  • This usually requires a good, stable job
  • Make sure you buy a place in an area you love
  • It might be possible to sell earlier if you change your mind but consider the costs
  • Homeownership is not for everyone!

If you wind up having buyer’s remorse, it might be possible to unload your unwanted home or condo. But you could pay the price, literally, via closing costs on both the buy and sell side.

And it’ll likely be taxing and a lot of work, assuming you aren’t using a service like Homie, Opendoor, or some other iBuyer.

So really take the time to think it through, and try to imagine yourself living in the property for at least five years.

While that might not be a requirement, you should at least consider longer timelines because homeowner tenures tend to be pretty long.

Finally, ask yourself why you even want to buy a place of your own? Because your friends are or because you’ve thought it through and believe homeownership fits your personality and financial path?

It’s probably not for everyone, and while a home purchase is often driven by emotion, it’s important to keep a level head while making this very big financial decision.

After all, you don’t want to be tethered to a certain area if you still want to keep your options open.

This is especially important for younger home buyers, who may still be deciding where it is they want to live, or what type of industry they want to work in.

If you think you’ll move for work anytime soon, it could be smart to pump the brakes on the home purchase and just take a wait and see approach.

Of course, it’s always a good time to educate yourself on homeownership so that when you’re truly ready to take the plunge, you can dive in with confidence.

Oh, and don’t forget to thank your parents for all those years of free rent!

Read more: 11 tips for buying a home in 2021

Don't let today's rates get away.

Source: thetruthaboutmortgage.com

20-Year vs. 30-Year Mortgages: Get a Lower Rate?

20-Year vs. 30-Year Mortgages: Get a Lower Rate?

It’s time for a new mortgage match-up.

Since paying down the mortgage early seems to be so en vogue these days, it makes sense to compare “20-year mortgages vs. 30-year mortgages.”

The most common type of mortgage is the 30-year fixed. It amortizes over 30-years and the mortgage rate never changes during that time.

Each mortgage payment is the same every month, so there isn’t any fear of interest rates resetting higher and pushing a homeowner toward foreclosure.

It’s also very affordable relative to other loan programs because of the ultra-long amortization period. Pretty straightforward, right?

For this reason, it holds a near-90% share of the home purchase market, and accounts for over three-quarters of all home loans, including refinances. It is the gold standard.

This simplicity and safety explains its popularity, but that doesn’t mean it’s the perfect home loan.

After all, they take a full three decades to pay off, and with first-time home buyers sometimes entering the market between the ages of 30 and 40, one could easily carry their mortgage into retirement.

Fortunately, there are other options with different loan terms to consider.

How a 20-Year Fixed Mortgage Works

20-year fixed mortgage

  • Just like the more common and popular 30-year fixed mortgage
  • The interest rate never changes during the entire loan term
  • But the 20-year mortgage term is a full decade shorter
  • This results in less interest paid in exchange for a higher monthly payment

The 20-year fixed mortgage is a pretty simple loan program, just like it’s much more popular cousin the 30-year fixed.

They’re actually no different other than the fact that the mortgage term is 10 years less.

Both come with an interest rate that never changes during the loan term, making it a safe choice for someone fearful of a rate adjustment on an ARM.

The borrower who opts for a 20-year fixed also gets to pay off their home loan a decade earlier.

Aside from owning your home much faster, you’ll also save on interest over the shorter repayment period.

Another benefit is that the interest rate is sometimes a bit cheaper as well, which results in a one-two punch.

20-Year Mortgage Loans Can Save You a Lot of Money

20-year fixed

  • It’s not very economical to pay back your mortgage over 30 years
  • Some will even argue that 20 years is too long as well
  • You pay a ton of interest over such an extended period of time
  • But not everyone can afford the higher monthly payment tied to shorter-term mortgages

When it comes down it, 30-year mortgages have some serious drawbacks, with the most obvious one being the long amortization period.

They also come with the highest interest rates relative to other loan programs. Yes, you pay a premium for the convenience of a fixed interest rate over three decades.

And since the mortgage takes so very long to be paid off, a lot more interest is paid and it takes forever to build home equity.

Think of it this way. If you borrowed money from a friend and asked to pay it back over 30 years, they would probably say no. Only mortgage lenders seem willing to do this.

If by chance they agreed, they’d want to charge you a higher rate of interest. And because you’d be paying it back so slowly, you’d pay a lot more interest over that time.

Assuming your loan amount is large, perhaps a jumbo mortgage, it could be the difference of many thousands of dollars versus a mortgage with a shorter term.

Consider a Shorter-Term Mortgage Like the 20-Year Fixed

  • A 20-year fixed greatly reduces the amount of interest due
  • And results in a home that is free and clear 10 years earlier
  • The monthly payment may not even be much more expensive
  • Perhaps just 1.2 to 1.3X that of a 30-year fixed depending on rate

So what are homeowners to do? Well, the most common solution to this ”problem” is to look at a shorter-term home mortgage instead, such as a 20-year loan.

While the 15-year fixed is the most common alternative, it comes with its own drawback, namely a much higher monthly mortgage payment that most home buyers can’t afford, especially first-timers.

In other words, not every homeowner can just say, “I want to pay my mortgage off faster” and switch to a 15-year fixed or 10-year fixed mortgage.

It gets very expensive. Nor can most first-time home buyers qualify at the higher payment.

Fortunately, there are mortgage product options in between, with the most common being the 20-year fixed mortgage.

A 20-year mortgage sheds 10 years off the typical loan term, and results in much less interest paid throughout its duration. The mortgage payments are also relatively manageable.

Tip: There are 20-year FHA mortgages and VA loans available if you don’t have a lot of down payment money but still want to pay your mortgage down fast.

Let’s look at an example of the 20-year fixed to illustrate the savings:

$200,000 Loan Amount 30-Year Fixed 20-Year Fixed
Mortgage Rate 4% 3.75%
Monthly P&I Payment $954.83 $1,185.78
Payment Difference $230.95
Total Interest Due $143,738.80 $84,587.20
Interest Difference $59,151.60

20-Year Mortgage Rates Are Cheaper

  • You should receive a lower mortgage rate if you opt for a 20-year fixed mortgage
  • How much lower will vary by bank/lender and how much you shop around
  • Expect a discount somewhere around .125 to .25% vs. the 30-year fixed
  • But be sure to put in the time comparison shopping

As you can see from the example above, 20-year fixed mortgage rates aren’t much different than 30-year fixed mortgage rates, though the 20-year mortgage does tend to price a little bit lower than the 30-year fixed.

That lower interest rate can save you even more over the shorter term of the 20-year loan.

Overall, I’d say that 20-year mortgage rates price about a .25% below a comparable 30-year fixed. So 3.75% instead of 4%, or 3.5% instead of 3.75%. You get the idea.

It does depend on the bank or credit union in question. Some may price the loan products fairly similarly, with the only difference reduced closing costs (or fewer discount points).

They’re definitely going to be higher than rates on a 15-year fixed, but you should save some money versus the 30-year fixed.

Of course, you have to consider your property type, credit score, down payment/home equity, other various borrower attributes, and whether we’re talking about conforming mortgages or jumbo mortgages.

Anyway, in our example above the homeowner with the 30-year mortgage pays about $230 less each month, despite the higher mortgage rate. Yes, their monthly mortgage payment would be significantly lower.

But the 20-year fixed results in interest savings of nearly $60,000 over the life of the loan! This borrower would also own their home free and clear an entire decade earlier.

Doesn’t 20 years sound a lot more reasonable than 30? You can actually see the light at the end of the tunnel and pay off the mortgage before your hair turns gray.

This shorter term can be pretty beneficial, especially if you plan to retire soon and anticipate being on a fixed income.

Or if you want to build equity and buy a move-up property in the near future, using the proceeds for the down payment.

The 20-year fixed is also a good alternative because you won’t break the bank making your mortgage payment each month.

It’s a nice middle ground between 30 years and 15 years, and highlights the importance of comparing mortgages across the whole spectrum.

But again, the monthly payment will be higher than the 30-year payment, which could stretch you thin or limit what you can afford if you’re buying an expensive home.

Tip: When obtaining a mortgage pre-qualification, ask your loan officer if you make enough to support 20-year fixed payments. Or simply do the math yourself with the help of a mortgage calculator.

Go With a 20-Year Fixed Mortgage to Stay on Course

  • If you have a 30-year mortgage and want to refinance to a lower rate
  • Consider switching to the 20-year fixed instead of getting another 30-year term
  • This way you won’t restart the (amortization) clock on your mortgage
  • You can save even more interest and pay off your home loan a lot faster

If you’re currently in a 30-year fixed, and don’t want to reset the mortgage clock during a mortgage refinance, consider a move to a 20-year fixed to stay on course without even paying more each month.

For example, if you’ve already been paying down your mortgage for five years, you won’t necessarily want to take on a fresh 30-year mortgage if your goal is to pay off your loan.

Because mortgage rates are so low at the moment, you may be able to refinance from a 30-year to a 20-year fixed mortgage and still lower your monthly payment.

Also keep in mind that there are other loan types outside the 15, 20, and 30-year options.

Some banks even allow you to choose your own mortgage term, whether it’s a 17-year fixed or a 24-year fixed.

So be sure to look at all available home loan options to determine which makes the most sense financially for your unique situation.

Also ask yourself why you want to pay the mortgage off sooner rather than later. There may be a better place for your money.

Read more: 30-year fixed vs. 15-year fixed.

Don't let today's rates get away.

Source: thetruthaboutmortgage.com

Why Joe Biden and Kamala Harris Haven’t Paid Off Their Mortgages

Why Joe Biden and Kamala Harris Haven’t Paid Off Their Mortgages

Posted on November 11th, 2020

You’d think presumably wealthy politicians like Joe Biden and Kamala Harris would own their homes free and clear. But that’s not the case, per their 2019 tax returns.

Both individuals disclosed their returns on the JoeBiden.com website, and each paid tens of thousands of dollars in mortgage interest last year.

But why would they pay interest if they had the means to simply pay off the loans, a luxury most other Americans can’t afford to do? The reason is simple.

Mortgage Debt Is the Cheapest Debt Out There

  • Joe and Jill Biden paid $15,796 in home mortgage interest in 2019
  • Kamala Harris and Douglas Emhoff paid $32,041 in home mortgage interest in 2019
  • There’s a good chance both parties could have paid off their mortgages in full
  • But why bother if you can earn a higher rate of return for your money elsewhere?

Why Biden and Harris and so many other rich homeowners choose to carry mortgages as opposed to paying them off has to do with how cheap they are relative to virtually everything else.

Ultimately, it doesn’t get much better than home loan debt, especially with mortgage rates in the 1-2% range at the moment. What other type of loan offers such cheap financing?

This is why I refer to mortgages as good debt, especially since you have the opportunity to write off the interest in many cases.

On top of that, the low rate of interest makes it easy for savvy homeowners to beat the rate of return on their mortgage by investing elsewhere.

Simply put, your mortgage rate is your rate of return if you choose to prepay your home loan ahead of schedule.

Any extra dollars put toward your loan essentially earn whatever your mortgage rate is, so if it’s 2.75%, you’re earning 2.75% if you choose to pay any extra each month or year.

Unfortunately, the lower mortgage rates go, the less it makes sense to prepay the mortgage because you’re earning a lower and lower rate of return.

Interestingly, we often hear feel-good stories in the news about everyday Joes paying off their mortgages in just 5-10 years. Or even less time. But why? What’s the rush exactly?

Getting Rid of the Mortgage Is a Psychological Victory

  • The obsession with paying off the mortgage is a psychological one
  • Often times there are better uses for your money than prepaying your home loan
  • An alternative might be to pay off other high-interest rate debt like credit cards
  • Or to invest any extra funds in the stock market, mutual funds, or a general retirement account

Sure, it’s great not to have to make a monthly mortgage payment, but that doesn’t mean it’s the best move financially to prepay your home loan.

Often, the desire to pay off the mortgage has more to do with human psychology than it does math.

It probably feels good to pay off any debt, especially a large sum of money such as a mortgage.

But as noted, it’s cheap debt and you might be better served putting extra dollars elsewhere.

Apparently, this is what Joe Biden and Kamala Harris do, and Obama did the same based on his old tax returns.

In the past, I reported that Joe Biden had been a refinancing machine, constantly taking advantage of cheaper financing by way of rate and term refinance to save money on his home loans.

One of the richest men in the world, Warren Buffett, has also been a proponent of carrying a mortgage for the same reasons.

You get to lock in an ultra-low mortgage rate for three decades and watch the payment become effectively cheaper over time as inflation erodes the value of the dollar.

It doesn’t get much better than that, especially when you might be able to write off the interest too.

This explains why Joe Biden, Kamala Harris, Warren Buffett, and even Facebook founder Mark Zuckerberg choose to hold mortgages when they can easily pay them off.

Read more: Should I pay off my mortgage early?

(photo: Elvert Barnes)

Don't let today's rates get away.
About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.

Source: thetruthaboutmortgage.com