Homeowners taking out 10-year mortgages

Wall Street Journal ^ | June 2, 2003 | RUTH SIMON

[Mears]

Yikes!!! The savings are unbelievable.

[Steven W.]

but the doom & gloomers worst case scenarios are dependent upon folks cashing out all their equity, throwing the cash in the street & then extending their debt back 30 years into the future. if people are, in fact, decreasing the terms of their mortgages (as many are) and paying them off quicker than expected, with more money going towards the principal and less towards interest, with the difference being used by the homeowners to increase their quality of life on a monthly basis, with that money going back into the economy, those are all tremendously good things that will have the doom & gloomers once again short covering & crying amidst their increasingly tremendous losses.

[Dog Gone]

I'm seriously considering doing this. I have a 30 year note at 6.25 with 20 years to go.

I haven't run it through a mortgage calculator, but my guess is that it's a no-brainer.

[FreeperinRATcage]

I went to a 15 year at 6.25 right before 9/11. After that, rates plummeted, but not enough to be worth incurring all the charges to refi again.

Of course, if you do have a decent amount of equity, you'd make out like a bandit.

[oldironsides]

Go to the mortgage site and work up the numbers. You will be convinced

[Thud]

All my refinances in the past 15 years have been with 15-year mortgages which I've thrown an extra $50-$100 at per month. But my children are in college now so I've been drawing down equity for the past two years - my home is pretty much my bank.

My wife wants to have a party when our first child graduates from college.

[mlmr]

I am taking out a 15 year at 4.75 through the internet. I wish I could go to ten, it would save me 17000 but I cannot manage the extra 300 per month.

[Ken H]

Check this out- http://www.1728.com/mortpmts.htm

[justlurking]

It's worth pointing out that one does not have to refinance to take advantage of a shorter mortgage. All you have to do is make an additional principle payment each month. using the =PMT() and =PV() functions in Excel, it isn't difficult to figure out how much extra you need to pay.

Of course, one reason the shortened mortgages are so popular is because you can refinance at a much lower rate and keep your payment about the same. I refinanced from a 30-year loan to a 15-year loan last year, but my payment only went up about $80/month.

I refinanced at 5%. I can now get 4.625% at the same mortgage company. I can't believe they are still going down.

[RightWhale]

This is a seismic shift. People may have borrowed all they care to and are coming back to earth. Also, if deflation is coming, people would want to get out of debt sooner rather than later. Make any sense?

[NV_Chuck]

Actually, you can still pay down principal on an existing mortgage but the interest rate is higher so you might as well get a ten year term if you can swing the payment.

On the other hand, you could alternately go for the lower payment of the 30 year loan and take the extra money and invest it something else such as the stock market or another income property. Depending on the performance of the investment, you may have more assets at the end of ten years than you would have with the shorter term mortgage. Of course if the alternate investments go sour or perform at a rate less than the tax discounted mortgage rate, you could have less assets this way.

If it's a choice of putting every extra dime to afford the ten year mortgage, you might be better off going with the longer mortgage and building up some liquid savings such as stock market and other investments. This assumes you have the financial discipline to save outside of the investment in your home.

For example, for me personally, given a choice of owning a $500,000 home outright vs. owning a $500,000 home with a $250,000 mortgage but having an additional $250,000 of cash in personal liquid savings, I would take the second situation. In the second situation, you have essentially the same net worth as the first situation, but you control more assets and have more financial flexibility.

[Texas Eagle]

You can achieve some of the same benefits of shorter-term mortgage simply by taking out a 30-year mortgage and making extra principal payments.

That's what we did. We had our loan officer print out the numbers for a 30 year loan at 5.75% and a 15 year loan at 4.75%. Then we had him figure out the monthly payment broken down by prinicipal and interest.

We discovered that even with the lower rate for the 15 year loan, we would save tons of money that would otherwise go to interest by going with the 30 year loan and make the 15 year payments.

[AZHSer]

We started in 94 with a rate over 7%. We refinanced 6 years later to 6.5% and dropped our payments by $100. Since we weren't used to having the extra cash we continued to to pay that $100 towards the principle. We also saved and paid an extra $1000 toward the principle a year. Last year we refinanced again to 5.5 with a 15 year loan and continued to put an extra $100 on it. If all goes well, we should be done in another 7 years. It is well worth it to refinance. Even if you just take out a 30 with a lower rate and continue making the old payments, the savings are fantastic. The secret is putting extra on the principle, even if it is just $10 a month.

[Joe Hadenuf]

My bet is that mortgage rates will be dropping even further. If they start raising interest rates anytime soon, during this economy, they will only make it worse.

[Skywalk]

The financial advisor, Rick Edelman(IIRC) advises AGAINST short-term mortgages, making extra payments or trying to "get rid of a mortgage."

His philosophy is that because of people having their homes taken away from in the Depression that it's become a part of the culture to fear foreclosure. Problem is, the law is different, the bank can not call in what you owe before it's due. Essentially, people are wasting their money by trying to get rid of debt and also mistakenly believe that their house is their best investment.

Like Edelman says, it's just a place you live in(Unless you're heavy into real estate.)

[Joe Hadenuf]

And that's exactly what many did after being burned by the stock market, they put their cash into RE.

[Texas Eagle]

The financial advisor, Rick Edelman(IIRC) advises AGAINST short-term mortgages, making extra payments or trying to "get rid of a mortgage.

I wonder what Rick's problem is? If a person pays only the required monthly payment on a 30 year mortgage, at the end of that 30 years, he will have paid at least double the selling price.

By making extra payments on principal, and shortening the life of the loan, he will save tens of thousands of dollars that would otherwise have gone to interest.

Whatever tax advantages you lose by paying off a mortgage is more than made up for by saving on what otherwise would have gone to interest.

[LizardQueen]

We went to 15 years at 6.625 just a year after we bought the house (original mortage was 30 years at 8.25) - this was in 1992, right around the time of the last recession.

We haven't bothered to refinance since according to the amortization chart we are paying almost all principle at this point, and it's not worth the refi charges with only 4 years left on the loan.

I LOVE being almost paid off. I know there are tax advantages to paying a big mortgage, but I really hate feeling like I'm living on the ragged edge of losing the house with a job loss. We're getting killed on taxes, though - didn't have enough mortgage interest or property tax expenses to clear the standard deduction last year.

We are going to take out a home equity to replace the siding sometime this fall, but we DON'T use it for anything else. We even save up and pay cash for cars.

LQ

[Skywalk]

I think it's because the MONTH TO MONTH cash you're spending on making extra principal payments could go to investments of various kinds that would earn one a net gain at the end of that 30 years.

Basically, thousands upon thousands of dollars properly invested can be a million or two million at the end of 30 years. By paying the mortgage more quickly or just bringing principal down, you are left with a damn house.

It would depend on how much loot one has. If I were incredibly wealthy I'd just buy without worry because monthly payments would be irritating.

Rick also correctly points out that constant references to the "Dow Jones" paints an inaccurate picture of the entire stock market, sometimes too rosy and others too gloomy, as it is only a measure of the very largest.

Just read some of his book, so I'd have to re-check a few factoids.