Refinancing your mortgage? Consider getting shorter term
Most people refinance to save money, which usually means jumping to a lower rate. But you can save big bucks by trimming the term of your loan, possibly at the same low rate.
Most lenders offer the same 30- year rate on mortgages with terms of 20 to 29 years, said KarenMayfield of Bank of theWest. And most offer the same 15- year rate on loans with durations of eight to 15 years.
You may not save any money immediately, at least not in terms of your monthly payment, but you could save a bundle in interest over the shorter life of your new mortgage. Plus, you’ll build a nest egg that much faster.
The potential drawback to shorter- term mortgages is your tax deduction for mortgage interest won’t be as large. But that’s a questionable disadvantage.
For one thing, interest is cash out of your pocket. Why spend the money if you don’t need to?
For another, mortgage interest is not a dollar- for- dollar write- off. Rather, the deduction is based on your income- tax bracket. So if you are in the 15 percent bracket, you’ll get back 15 cents for every dollar in mortgage interest you spend.
Then there’s the question of whether mortgage interest will remain deductible. Granted, it’s a long shot right now that Congress would eliminate the benefit. But make no mistake, the once- sacrosanct write- off will be on the table if and when lawmakers ever reform the nation’s tax code.
So, with the deduction argument out of the way, let’s look at some possibilities using, for simplicity’s sake, a loan amount of $ 300,000.
Say you have a four- year- old, 30- year mortgage at 6.5 percent, with a monthly payment to principal and interest of $ 1,896. If you refinance at 4 percent into a new 30- year mortgage of $ 288,000 ( your present balance of $ 285,179, plus $ 2,821 in closing costs wrapped into the loan amount), your payment will drop to $ 1,375, a significant monthly savings of $ 521.
But you’d be starting all over again. As a result, on top of the $ 76,196 in interest you’ve already spent on the original mortgage, you’d be paying an additional $ 206,984 in interest over the term of the new loan.
Sure, most people don’t keep the same house, let alone the same mortgage, for 30 years. Indeed, the average life of a home loan is about seven years. But if you do, if this is your final castle, you will be paying for it for 34 years, not 30.
Now, suppose instead of opting for a lower payment, you decide to shoot for the same monthly payment but reduce the term of the loan. A new $ 288,000 mortgage at 4 percent over 20 years will run $ 1,745 a month.
That cuts your monthly outlay by about $ 150 and saves a lot of interest—$ 130,854 for the 20- year loan at 4 percent versus $ 206,984 for the 30- year loan at 4 percent and $ 382,633 for your original loan.
Better yet, you are not starting over. Again, most people don’t keep their loans forever. But asMayfield pointed out, people’s lives do change. And as they do, it’s sometimes necessary to have a nest egg.
Say, for example, 10 years from now, your child wants to go off to college or gets married. Either way, you’re going to need some cash. Good for you if you’ve been saving regularly for these kinds of events. But if you haven’t, you still might be able to borrow what you need at the going interest rate.
Another option is to take it out of the equity you’ve built up in your house. Just how much equity might be available a decade from now will depend on two factors: appreciation, or how much your place has increased in value, and the term of your mortgage. Only one, the loan’s term, is a sure thing.
If you opt for the new 30- year loan in the above example, you will have accumulated $ 51,102 in equity by making your payment every month over 10 years. Why so little? Because in the early years of any mortgage, the lion’s share of the payment goes to interest. In fact, it isn’t until the 20th year or so more of the payment is earmarked for principal than interest.
Mortgages with shorter terms amortize, or pay down, faster than those with longer terms. So if you opt for the 20- year loan above, you will have amassed $ 115,624 in equity after 10 years. That’s more than double the equity buildup.
Shortening the length of your mortgage isn’t for everyone. But if you are comfortable making roughly the same payment as you are now, it is worth considering.
“Do the math,” Mayfield said.
Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous sheltermagazines and housing and housing- finance- industry publications. Contact him at lsichelman@ aol. com.
OCT. 24 A property investment and home sellers seminar will be held 10: 30- 11: 45 a. m. at Tuscan Sun Coffee Company, 8608 Texas 6 north ( between Huffmeister and West Road).
The seminar, hosted by Megan Donaldson, Certified Residential Specialist with RE/ MAX Memorial, will cover steps to buying homes as an investor, building solid credit as an investor, 2012 mortgage regulations, loans available to investors, 1031 Exchange, benefits in using 401( k)/ retirement funds as down payment to purchase investment property, daily foreclosure and HUD listings, rent- to- own procedures for tenants, negotiating closing cost, purchasing multiple properties, and procedure for purchasing HUD and foreclose homes.
Other topics will include staging a property for sale, preparation for a mortgage, prequalification for a loan, understanding purchase contracts agreement and avoiding fraudulent investment scheme.
There will be review of short sale, purchasing at real estate auction and approach to preforeclosure offers.
Texas Real Estate Commission Inspector and TREC certified instructor Michael Race with Pillar to Post will cover home inspections, pre- inspections and costly mistakes to avoid. Information pertaining to title insurance and issues relating to title commitment will be presented.
Registration is required; email megan. donaldson@ remax. net, including name, phone number and number of reservations or call 713385- 5231.
OCT. 27 A buyers seminar will be held 10- 11: 30 a. m. at 10497 Town and Country Way, Suite 120. Buyers considering purchasing a new or newer home will learn about nearby communities on the west side and Inner Loop of Houston.
Other topics include financing options, qualifying for a mortgage, modern construction features and the buying process.
Andrew Chong, Realtor with Keller Williams Realty, and Debbie Cash, vice president, Starkey Mortgage, will present. Seating is limited. For reservations, contact Chong at 281- 4619393, Ext. 191.
OCT. 27 A home buyers seminar will be 1: 45- 3 p. m. at The Cool Runnings Restaurant meeting room, 8220 West Bellfort St. The seminar, hosted by Megan Donaldson, Certified Residential Specialist with RE/ MAX Memorial, will cover steps to buying a home; 2012 credit restoration programs; obtaining free HUD foreclosure listings and no down- payment programs eligibility. Attendees will find out current credit scores and debt ratios for the down- payment assistance programs. There will be a discussion about USDA 100 percent loan program in the Houston area, which does not require a down payment, and current down payment programs.
Other topics will include preparation for a mortgage, prequalification for a loan, understanding purchase contract agreement, the art of negotiating, home- warranty protection services, key questions to ask when buying a foreclosure or HUD home, buyer’s financial assistance, and preparation for purchasing existing or new- construction home.
Texas Real Estate Commission Inspector and TREC certified instructor Michael Race with Pillar to Post will cover home inspections and costly mistakes to avoid.
Information pertaining to title flaws and the benefits of clear title will be presented.
Registration is required; email megan. donaldson@ remax. net, including name, phone number and number of reservations or call 713385- 5231.
OCT. 30 A home buyers seminar will be held 6: 45- 8: 15 p. m. at Tuscan Sun Coffee Company, 8608 Texas 6 north ( between Huffmeister and West Road). The seminar, hosted by Megan Donaldson, Certified Residential Specialist with RE/ MAX Memorial, will cover steps to buying a home; 2012 credit restoration programs; obtaining free HUD foreclosure listings and no down- payment programs eligibility.
Attendees will find out current credit scores and debt ratios for the down- payment assistance programs. There will be a discussion about USDA 100 percent loan program in the Houston area, which does not require a down payment, and current down payment programs.
Other topics will include preparation for a mortgage, prequalification for a loan, understanding purchase contract agreement, art of negotiating, home- warranty protection services, key questions to ask when buying a foreclosure or HUD home, buyer’s financial assistance, and preparation for purchasing existing or new- construction home.
Texas Real Estate Commission Inspector and TREC certified instructor Michael Race with Pillar to Post will cover home inspections and costly mistakes to avoid.
Information pertaining to title flaws and the benefits of clear title will be presented.
Registration is required; email megan. donaldson@ remax. net, including name, phone number and number of reservations or call 713385- 5231. The Houston Chronicle Real Estate section presents the seminars calendar as a service to our readers. The sponsors of the free seminars state these seminars are informational only. There will be no solicitation of business, and no items will be sold at the events.