Buy or refinance now!

Hal wrote:

jrw1621 wrote:

dyintorace wrote: Do I take a full extra payment and send it in each January (or some other annual anniversay)? Or do I take a full payment, divide it by 12 and send that amount in as extra principal each month?

Any money that you throw at the principle is good. The earlier you throw it at the principle the better. So, if you question is: 1. Should I keep some money in a jar and then on-time, at the end of the year, make an extra payment? or 2. Place an extra $100 to each payment ($100 x 12 months = $1,200 for the year) The answer is give the money to the bank as quickly as you comfortably can so choice # 2 would be better. You are paying interest on what you still owe. Any dollar given is another dollar that you do not have to borrow and therefore pay interest upon.

\ Definitely choice #2. We have done that every time (4 times so far)we have mortgaged the house. Send an extra $100 or so every month you can afford to. If you can't some months (holidays, emergencies, etc.) there is no penalty if you don't.

Paying it off is the way to go. Sending extra in with your payments gets you there quicker by saving on interest. I do caution my borrowers not to send in EVERY extra penny they have as getting money back out of a house is expensive and when you really need it, no one will lend it to you.

I'm with Hess on this (gasp!). I view payments into my mortgage as investments with a 5% (or whatever) return. My wife is slowly coming around to this way of thinking. She's a bit spooked on the lack of liquidity, but we now have such a low percentage of our home financed that it wasn't difficult to arrange a line of credit backed by the house for emergencies. Haven't used it yet, but it's there and it allows us to take money out of our house "account" if needed.

nderwater wrote: I'm almost 6 years into a 30-year adjustable rate mortgage. Right now my rate is unbelievably low, but I know it won't stay there forever. I'd like to refinance, but I also don't want to throw away six years of payments. Do you know of a tool to calculate the break-even point so that I can compare the numbers between keeping the current loan and refinancing?

Here you go.

Mortgage prepayment tools

I've used these calculators for years. I think you will find ones about halfway down the page under "Mortgage Calculators" that will do what you need to.

BTW- the auto calculators may convince you to only pay cash for a car!

Thanks for the help with my question folks!

Another option to be aware of, for those considering a re-fi, is to check with your current lender about doing a rate modification.

Essentially, you are refinancing with your current lender at a lower rate. Because you are staying with them, the closing cost are significantly lower because they may not have to do things like another title search, etc. They also get motivated because they know that you're shopping for a new mortgage and may go elsewhere.

We've done it twice. The last time, I believe it paid for itself after only nine months.

My bank only allows you to do it once every 3 years, so you want to do it when you feel that rates have bottomed out.

I refi'd a short while ago. Dropped 1% off my interest rate (which was already really good) and went from 23 years down to a 20 year fixed rate loan.
Good money move indeed.

We did the same, dropping 6 years off our note and keeping the payments the same....that'll pay for itself in 13 months (11 months now)

bludroptop wrote: If you are considering buying a home with FHA financing, and can pull the trigger - do so! After October 4th, the up-front cost of a FHA loan will go down, but the monthly premium will nearly double. If your lender gets a 'case number' from HUD before 10/4, the old premiums will apply.

Thanks for this info, I will ask our broker about it. We are getting all the necessary paperwork over to him this week to get preapproval on an FHA loan.

Lots of other good advice here, what a well timed thread.

I'm 4 years into a 15 year @ either 4.25 or 4.75% ( I don't remember which). My rate isn't bad, and I'd have to refi for a shorter term to make it worth my while. I'm into the meat of my amortization schedule now, where over half of my payment is actually on principle. I think I'm one of few for whom a refi isn't a "duh" right now.

Now I would like to refi my second. It's a floating HELOC. Banks, brokers, etc. seem less interested in that.

Long loans are freaky! Just took a look at mine (4%, 15years, $130,000). We pay approximately $400 a month in interest. That's right, $400 a month just for the right to borrow that money even with a low rate and short term loan.

MrJoshua wrote: Long loans are freaky! Just took a look at mine (4%, 15years, $130,000). We pay approximately $400 a month in interest. That's right, $400 a month just for the right to borrow that money even with a low rate and short term loan.

Yep.

I won't make the promise never to borrow, because there are times to, but it would suit me just fine to pay this one off before I'm 40 and then pay cash for the beach house / lake house / zombie compound.

DILYSI Dave wrote: Now I would like to refi my second. It's a floating HELOC. Banks, brokers, etc. seem less interested in that.

Have you tried calling your bank on that HELOC - sometimes they do have an option to fix the rate on the existing balance but you have to ask.

I just talked to my mortgage guy. Rough numbers, if I switch from my current 30-year to a 15-year with the current rates, I'd pay around $150/month more - and save enough money to buy a brand new Cayman S plus a whole garage full of tires

Keep in mind you aren't "losing" all the money you pay in interest. First of all, many of us take a home mortgage interest deduction. For me personally, I get back about 37.5% of what I pay in interest through reduced taxes (including federal and state). That means my current mortgage rate of 5.125% only really costs me 3.20%. That is cheap money.

Conceivably, I could invest my extra funds in tax free municipal bonds instead of paying down the mortgage and make money on the difference between the interest rate of the munis and my mortgage rate. In reality, I pay extra on my mortgage because I don't like debt and I don't want to be paying for a house for 30 years. The point is that you can't just say that it is a bad idea to have a big mortgage or to pay it over an extended time.

The usual caveats apply that you can usually get lower rates on shorter term loans, you might not need the interest deduction, and probably is a good idea to refinance if you get a low enough rate to recoup closing costs fairly quickly.

My mortgage company allows me to refinance at a lower cost without paying a penny, not in cash, not rolled into the loan - nothing. I presume they do this to keep me from refinancing with a different company. I've done it twice in the 3 years I've been in my house.

Otto_Maddox wrote: Conceivably, I could invest my extra funds in tax free municipal bonds instead of paying down the mortgage and make money on the difference between the interest rate of the munis and my mortgage rate.

I would recommend this..

Simply put homes are not good investments.

I've read some articles and done some thinking myself. Here's the conceptual breakdown. You own a home for 30 years and purchase for $50,000 and sell for $400,000. Wow you think $350,000 in profit. Well yes and no.. If you subtract all the improvements you made to your house, deck, new windows, paint, landscaping, .. You're in the 2-3% per year of appreciation... Not that great, when you can do annualized 5-7% out of an index fund.

The best part about home ownership vs. renting: at some point you will want to quit work and retire. When you do, a paid for house will mean about $1.5k a month in savings. So yeah I'm working toward having a paid for house by retirement time.

In reply to ignorant:

Most people do this with general budget money, not investing money. There may be better ways to invest your money, but that's a different question.

Just refinanced at 4.50% for 30 years. I wanted to go to a 20,but the 30 made more sense in my head. We plan on taking the $200+ we "saved" a month,and putting it away for the next year for a strike fund(contract year),and then put it towards the principal thereafter to pay down the years. The closing cost weren't too bad either. We just closed last Wednesday,and it was pretty painless to go from a 5.67%,to the 4.50%. FYI we were 5 years into the original 30 year note. We could always pay this one down quicker,so it made sense.

<-- in the camp that believes a home is a home and an investment is an investment. If my home works out to be an investment, that's cool, but it's primary job is to keep a roof over my head. A paid off house is security and freedom.

Jensenman wrote: The best part about home ownership vs. renting: at some point you will want to quit work and retire. When you do, a paid for house will mean about $1.5k a month in savings. So yeah I'm working toward having a paid for house by retirement time.

Couldn't agree more. While I just signed a 30 year mortgage this past Thursday (and I'm 41), I've already done the math, thanks to help here, and determined what we need to do in order to pay it off in 20 years. Having a paid for home when I'm 61 would feel glorious.

dyintorace wrote:

Jensenman wrote: The best part about home ownership vs. renting: at some point you will want to quit work and retire. When you do, a paid for house will mean about $1.5k a month in savings. So yeah I'm working toward having a paid for house by retirement time.

Couldn't agree more. While I just signed a 30 year mortgage this past Thursday (and I'm 41), I've already done the math, thanks to help here, and determined what we need to do in order to pay it off in 20 years. Having a paid for home when I'm 61 would feel glorious.

Damn, you old balls.

Osterkraut wrote:

dyintorace wrote:

Jensenman wrote: The best part about home ownership vs. renting: at some point you will want to quit work and retire. When you do, a paid for house will mean about $1.5k a month in savings. So yeah I'm working toward having a paid for house by retirement time.

Couldn't agree more. While I just signed a 30 year mortgage this past Thursday (and I'm 41), I've already done the math, thanks to help here, and determined what we need to do in order to pay it off in 20 years. Having a paid for home when I'm 61 would feel glorious.

Damn, you old balls.

Agreed.

dyintorace wrote:

Osterkraut wrote:

dyintorace wrote:

Jensenman wrote: The best part about home ownership vs. renting: at some point you will want to quit work and retire. When you do, a paid for house will mean about $1.5k a month in savings. So yeah I'm working toward having a paid for house by retirement time.

Couldn't agree more. While I just signed a 30 year mortgage this past Thursday (and I'm 41), I've already done the math, thanks to help here, and determined what we need to do in order to pay it off in 20 years. Having a paid for home when I'm 61 would feel glorious.

Damn, you old balls.

Agreed.

I make them look like kids.

I'm back! Man things have been busy. I picked the absolute worst time to post for me because I write a weekly market update for a number of Realtors and Builders and I've been pecking at this issue for several weeks and suddenly everyone calls at the same time.

I've read thru the posts and there's been some good info. One piece of that bothers me is people keep talking about restarting your loan over at 30 years again. That's exactly what I was talking about that you need to challenge. At these rates you need to grab as much goodness as you can before the rates start to climb again.

Refinance for the SHORTEST term you can afford, don't go for the 30 year loan, go for 15-20 or even 25 years. You'll accrue much more payment equity, you'll get an even lower interest rate, and you can somewhat beat the new tougher qualifying standards since lower term loans have more liberal qualifying standards. You might not stay in your home long enough to pay it off, but when you do go to buy your next home at the much higher interest rates you'll be able to do a much smaller loan and therefore will not get hit as hard with the higher rates.

A refi is a new loan with all the same costs you had when you bought it. Well there are a few discounts, but they are minimal. If you do a shorter term your benefit isn't recapturing you closing costs thru a lower payment, it's building a much larger equity much sooner in the process due to the lower rate and the shorter term. As someone mentioned by owning vs. renting at retirement you can have a place to live without a payment (except for taxes and insurance).

Someone mentioned a Loan Mod. You've got to be very careful the new PC Loan Mod term refers to what is treated much like a foreclosure. A Cram Down is a better description of the modern day Loan Mod.

What the poster talked about was where his bank made him a loan and intended to keep it forever. The bank never packaged it for sale on the secondary market and therefore they would negotiate a streamline refinance and basically just lower the rate while charging for refiling and paperwork costs. THAT IS A VERY RARE SITUATION. Banking regs require the banks to keep most of their loans liquid which means they follow Fannie Mae and Freddie Mac guidelines and then you have to do a full refinance.

As far as homes being good or bad investments I'm in the camp they are neither they are EXCEPTIONAL investments. There's more to an investment other than just a dollar return. Throughout modern history a home has netted you more money than you put into it, but there's the intangible of being able to fix the house up as you'd like it to. There's that other intangible of being able to pay it off and live free - ya can't do that in a rental property. There's also the forced savings plan of the home that gives you the capital to buy the newer, bigger, prettier home that you'll want in 10 years. There's many sides to an investment.

Forgot to address the question of how to pay extra on your monthly payment. I'm in the camp of paying once a year when you have the money instead of monthly. More benefit will accrue paying it monthly because as someone else said, the quicker you pay against the principle the faster it will pay out. But I've done the math and the difference between paying a little every money vs. one lump sum is small enough to not be worth the hassle.

What hassle you ask? Dealing with your mortgage company. The gals who open the checks are high school drop outs. Many, many times I've received calls from previous customers talking about how their checks have been returned because it was for the wrong amount and now they are 30+ days late.

For simplicities sake I say pay one ( or maybe 2) times a year and pay it with a separate check. Mark the check clearly as extra $$$ to be applied to principle AND put a sticky note on the house payment check explaining what the 2nd check is for.