Go with refinancing and pay your house off in 20 years or less & save ten's of thousands of dollars.

Question:

Dear Ben,
My wife and I are trying to figure out if it's a smart move to refinance our current loan -- we just finished paying off the first year -- and go from a 30-year fixed-rate mortgage to a 20-year fixed-rate mortgage.

I don't know if it is better to use the money we spend on the origination fees and settlement fees or to put that money directly toward the current mortgage principal. Here are the numbers:

Current loan

·         30-year fixed-rate loan of $317,400 at 5.375 percent.

·         Paying $1,777.35 a month plus $479.79 for escrow for a total monthly payment of $2,257.14.

We've paid off one year of the original loan to a loan balance of $312,649.24. I had put down 25 percent when I bought the house for $423,000.

New loan

·         20-year fixed-rate loan for what I assume will be $312,649.24 at 4.375 percent.

·         Pay $1,956.94 a month plus $479.79 for escrow.

I will also have to put down $7,500 for closing costs.

Added bonus: We were also thinking of putting another $30,000 toward the principal since this money is currently in a money market account and not earning very much. Should we put this money toward the new loan or the old loan? Any insight would be greatly appreciated. 

Answer:

I ran the numbers for you, too. At $7,500, I think your closing costs are a little high.  A Closing cost study has the national average for closing on a $200,000 purchase mortgage at $3,741. Have your lender walk you through the projected costs.

Mortgage rates are lower now than the rates you provided, but I've used your 20-year rate for the illustration below:

 20-year rate expense

	Existing 30 year Mortgage	Refi with a  20-year mortgage
Loan amount:	$312,649	$312,649
Interest rate:	5.375 percent	4.375 percent
Loan term (months):	347 months remaining	240
Mortgage payment:	$1,777.34	$1,956.94
Total payments:	$616,738	$469,666
Total interest:	$304,089	$157,016
Effective interest expense1:	$228,067	$117,762

¹ Assumes 25 percent marginal federal income tax rate and no state income tax impact.

Saving 1 percent on the interest rate and shortening the loan term to 20 years cuts your interest expense in half. The effective interest expense assumes you can fully utilize the mortgage interest deduction on your federal income taxes.

I also ran the numbers for your additional payment scenario. The additional principal payment is larger for the existing mortgage by $7,500 because you don't have to pay any closing costs. You would want to make sure there isn't a prepayment penalty before making that big of an additional principal payment on the existing loan.

Additional payment expenses

	Existing mortgage  w/additional principal  of $37,500	20-year refi  w/additional principal  of $30,000
Loan amount:	$275,149	$282,649
Interest rate:	5.375 percent	4.375 percent
Loan term (months):	265	240
Mortgage payment:	$1,777.35	$1,769.16
Total payments:	$470,722	$440,599
Total interest:	$195,573	$141,950
Effective interest expense1:	$146,680	$106,462

¹ Assumes 25 percent marginal federal income tax rate and no state income tax impact.

As you can see, there's a $40,000 difference, after-tax, in interest expense by refinancing, plus making the additional principal payment. You'd want to make sure you're not emptying out your emergency fund to make the additional principal payment.

My rule of thumb with additional principal payments is to go ahead and make them if you expect to earn less after-tax on your investments than the effective rate on your mortgage. This is assuming you can fully utilize the mortgage interest deduction.

Even if closing costs are to be on the high side,  I'd go with a refinance, presuming you plan to be in the house long enough to justify those closing costs.

FHA Higher Loan Limits Extended, a necessary evil for the housing market!

There wasn't much fanfare, and it literally happened in the cover of night, but sometime after midnight Thursday morning, the U.S. Congress passed an extension of the increased Fannie/Freddie/FHA loan limits for high cost housing markets to a maximum $729,750.

Big deal, right? Well, yes. 

The higher loan limits for high-priced housing markets were instituted back in 2008, when President George W. Bush signed the Housing and Economic Recovery Act.

At the time, the mortgage market had crashed entirely, and the only games left in town were Fannie, Freddie, and FHA.

They each had a loan limit of $417,000, which knocked an awful lot of potential borrowers out of the game. The move was designed to moderate the credit crunch and promote borrowing and buying. 

Since the peak of the housing boom in 2006, home prices are down 28 percent (S&P/Case-Shiller). That means many higher-priced markets aren't quite so high-priced anymore. Of course there are still hot spots, many in California, where the median home price is well over $417,000, but the national median home price currently stands at $178,600 (National Association of Realtors). 

More important than home prices, however, are the players in the mortgage market today, or, shall I say, the lack of players in the market. Fannie, Freddie and FHA are originating around 90 percent of all new loans today. Higher loan limits therefore afford higher risk to these entities. The Federal Housing Administration (FHA) reports that loans over $400,000 have a higher risk of default. 

Government officials continue to claim they want to increase private sector mortgage activity, and they have to. In order for the Obama Administration to expunge Fannie and Freddie from the U.S. mortgage market successfully, they have to ensure there's a market in existence behind them. Right now there isn't. Investors don't want to touch anything that doesn't carry a government guarantee. 

 Letting the loan limits drop to the previously legislated $625,000 limit, some argue, would have at least been a little boon to the jumbo market, which is struggling for business right now. But would it really juice the private mortgage market?

Some claim the only way the private market will ever recover is to start rolling back the loan limits, at least slightly, because if we continue the government loan limit status, nothing will change and the government will control 90 percent plus of the mortgage market for the foreseeable future. 

The trouble with that argument is that at the present time there are no investors for the loans.

There has been exactly one jumbo securitization in the past year, and it wasn't all that big.

Why?

Because potential investors in potential private label mortgage securities need to know what the new structures of these loans will be; they need comfort that their interests are aligned with the interests of all the players that exist between them and the borrowers (servicers, appraisers, etc.).

The Dodd-Frank financial reform bill did not mandate risk retention by any of the intermediaries, at least not yet. Policy makers have a year to define what exactly is a "qualified residential mortgage." So bottom line, without the increase in the loan limits, a fairly sizeable part of the mortgage market would have ground to a halt.

Lawmakers had no choice.

Simple Secrets of Living Debt-Free From those who don't owe a penny

If you can’t afford to pay for it now, you can’t afford it. When my grandfather told me that 40 years ago, it didn’t sound nearly as radical as it does today. Grandpa borrowed money only once in his life -- to buy a house -- and even then he paid it off long before the bank required.

Of course, times are different now. Everything costs so much more. There’s no way you can live comfortably these days without borrowing money and going into debt.

Wait a minute! If you believe those last three sentences, then have we got an article for you. Those three sentences are as false as Grandpa’s teeth.

I picked the brains of some leading personal finance experts and my own network of volunteer "Miser Advisers" to get their thoughts on living comfortably without going into debt -- or at least without borrowing to the extent that most Americans do today. Here are their secrets...

Be afraid, be very afraid, of credit cards. To paraphrase Jack Nicholson’s character in the movie A Few Good Men, "Credit cards? You can’t handle the credit cards!" Roughly 60% of active credit card accounts are not paid off every month. Many people think that they can game the system -- earn lots of bonus points or cash back by frequently using a credit card -- and pay it off every month. In reality, most people just end up in debt.

Pay in cash, and you certainly will spend a lot less. According to Bankrate.com, the average credit card purchase ends up costing 112% more than the purchase price (that’s right, more than twice as much) because we fail to pay it off right away.

To me, there are only a few wise uses of a credit card. These include establishing your credit history... genuine emergencies... and transactions such as car rentals that require a card.

Practice the art of procrastination. When it comes to debt-free living, procrastination can be a virtue, not a vice. We’ve all had buyer’s remorse. That’s the feeling of regret you get when you buy something that disappoints you. Buyer’s remorse often is compounded by a sense of guilt when you buy something on credit. The purchase has disappointed you, and you haven’t even paid for it yet.

Practice procrastination when it comes to discretionary purchases, particularly if you plan to use a credit card. Wait at least one week between the time you see an item in a store or online and the time you go back to buy it. Chances are good that you will decide that you don’t want it after all. And whenever you do buy, save your receipts so that you can return items you regret for a full refund.

Shine up that used car. When it comes to buying an automobile, the smart money is almost always on buying a used (but not abused) vehicle, so you let the guy who buys the new car pay the 20% or more in value that most new cars lose in their first year of ownership.

Still have that urge-to-splurge on a new car? Anthony Manganiello, author ofThe Debt-Free Millionaire, has this simple advice that helps him resist the call -- keep your car really clean. He says that a sparkling used car feels like a new car and helps him resist the unending barrage of car commercials.

Buy a home, not a castle. Granted, few people can afford to buy a home without taking out a mortgage, but that doesn’t mean that you need to live your entire life with a mortgage hanging over your head, as many Americans do. The secret is to choose a house costing no more than 75% of the maximum amount you can qualify to borrow and then aggressively paying off your mortgage early.

"The priority is to get into something you can afford and then work on trading up or improving the house you have," says personal finance columnist Gregory Karp in his book Living Rich by Spending Smart.

Once you’re in that affordable home, begin making extra principal payments to pay off the loan early. If in the course of a year you make just one extra monthly payment, you can knock years and many thousands of dollars in interest off your mortgage.

Ask yourself, "When is Christmas next year?" That sounds like a stupid question, but as Heather Wagenhals of the Unlock Your Wealth Foundation points out, many people are financially blindsided every year by holidays, vacations and other "spending events" that can be planned for well in advance.

The same goes for "emergencies." Certainly it is possible to have a truly unanticipated financial emergency, but for many people, almost everything is an emergency because they’ve failed to plan -- and save -- for even those things that can be anticipated. A car with 100,000 miles on it needing repairs shouldn’t be an emergency. You know it’s going to need repairs... you just don’t know exactly when.

Figure out what Grandpa would do. If you still aren’t convinced that it’s possible to live debt free, or nearly so, like previous generations of Americans did, keep track of everything you spend money on for a month. Then look at that list, and ask yourself one simple question, "Did my grandparents spend money on that?" A second or third automobile? Unlikely. More than one TV? Doubtful. Meals in restaurants, other than for very special occasions? Rarely. Pet-grooming services? Not a chance. Bottled water? Are you crazy? Tanning salons? Fuggedaboutit.

Mortgage Rates Hit 4.36 Percent, Lowest in Decades

Mortgage rates fell to the lowest level in decades for the ninth time in 10 weeks as concerns grow that the economy is weakening.


Mortgage rates once again fell to their lowest level in decades this week.

Mortgage buyer Freddie Mac says the average rate for a 30-year fixed loan was 4.36 percent this week, down from 4.42 percent last week.

That's the lowest since Freddie Mac began tracking rates in 1971.

The average rate on 15-year fixed loan dropped to 3.86 percent from 3.90 percent the previous week. That's the lowest on records starting in 1991.
Rates have fallen since spring as investors shifted money into the safety of Treasury bonds, lowering their yield. Mortgage rates tend to track those yields.
 
If you think you there is a chance you can save money by refinancing, you better get off the fence and do so now.
 
If you need to fix your credit, don't wait.  We have team members that help with this and will get your credit back into shape where you need to be. 
 
You can contact us through our web site:  http://www.wedohomeloansforyou.com/
 

An August Surprise from Obama?

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.
2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:
GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.
And this from Mizuho Securities:
As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.
Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.
3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.
But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.
4) And don’t think the White House is worried about financial market reaction. If they thought it would pass Congress, they would be submitting a $200 billion Stimulus 2.0 (3.0?, 4.0?) right now.
August is supposed to be a slow month for Washington politics. But maybe not this one.