Homeowners taking out 10-year mortgages

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

[Skywalk]

As far as I know, while some investments are made for short-term gain, the majority are made with a sense of the long-term(meaning 20-30 years.) So there are ups and downs, but the market has, with its ups and downs, gone up and provided for significant returns. Of course, one has to monitor basic developments so that you aren't heavily invested in just one stock(like the morons at Enron) but in general, you are better with a diverse portfolio that effectively mixes moderate-risk and low-risk investments of various types.

I'm not saying you should NEVER pay these guys off early, especially if you have SIGNIFICANT stores of money and a large income relative to your house's value. In THAT case, it might be worth getting rid of the monthly hassle.

[AlaskaErik]

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.

Try your local credit union. I'm doing a 15 yr refi at 4.5%. If I was buying a new house, the rate would be 4.375%.

[justlurking]

There's one important thing that he overlooked in his comparison of Pat and Ed: When Ed only put 5% down on the house, the mortgage company will insist that he pay PMI (private mortgage insurance).

PMI protects the mortgage company from eating the loss if they foreclose on the house and the house sells for less than the outstanding balance on the mortgage.

PMI is typically required for loans exceeding 80% of the market value of the house. On a $100,000 loan, PMI ranges from $30/month to $50/month in Texas, depending how big your downpayment is.

You can get PMI removed when the market value of the house goes up enough, or you pay off enough of the balance to get your equity up to 20%, the mortgage company should do it automatically.

But, they are only required to do it on loans originated after 7/28/1999. For loans originated before that date, you must make the request for cancellation.

Note: this is for Texas homeowners. Your state may be different.

[Skywalk]

Thanks for the different perspective and I defer to your knowledge of your state's regulations.

As always, one should gather ALL available facts and be honest in their appraisal of their situation before making this decision.

[Texas Eagle]

For example, you make extra payments and pay off your mortgage, so you own your house free and clear. Now you lose your job--try tapping into your equity to support yourself until you find a new job.

Okay. So let's say I lose my job when I still owe money on my house. Just for the sake of ease, let's say my monthly house payment is 1,000 dollars.

If I lose my job while I still owe on my house, I absolutely HAVE to come up with 1,000 dollars plus whatever I HAVE to come up with for food, electricity, etc.

If my house is paid off and I lose my job, I have 1,000 dollars LESS to worry about, don't I?

[AlaskaErik]

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.

This one of the biggest fallacies about interest...that there is a tax advantage. Yes, you do get a break, but if you're in the 33% tax bracket it's like making a loan to someone and getting back 33¢ on the dollar. Some investment! Remember, you get no use out of interest. I'd much rather have my house paid for and have the standard deduction. Now, that is free money.

[Texas Eagle]

How much will your monthly payment be on a 10 year loan?

[Texas Eagle]

Great point. I'll stand here all day and give people 33 cents back for every dollar they give me.

[Mannaggia l'America]

For example, you make extra payments and pay off your mortgage, so you own your house free and clear. Now you lose your job--try tapping into your equity to support yourself until you find a new job. You won't be able to. If you'd been investing the money in other, more liquid places rather than in paying off your mortgage early, you'd have a huge fund to live off of.

I'm with you. There's nothing like cash in the bank (or similar).

Let's say I channel extra $ into my house and I get it paid off in 10 or 15 years. Now my oldest kid is ready for college - I have to go ask the bank if I can borrow my own money that is tied up in the house. What if rates are 10% or 15% then? Anyone remember the late 70's and early 80's?

[Skywalk]

But you could just as easily lose your job in the 13th year of a 15 year note and have a higher payment to come up with than if you have a bad spot.

Nothing is drawback-free, last time I checked, but the overall benefit to the longer-term note FOR HOUSES is greater than the drawback.

And the interest deduction is hardly the only benefit of the 30 year.

[Fred Mertz]

Yes, you'll have much more independence and the financial institutions won't be treating you like a serf.

That old phrase that "it's the American way to be in debt" is standard propaganda. The opposite is true.

[Texas Eagle]

Now my oldest kid is ready for college - I have to go ask the bank if I can borrow my own money that is tied up in the house.

But you're house is paid off, right?

[Skywalk]

Bingo!

Why pay the bank extra money that you're going to be asking in the form of ANOTHER loan anyway?

Pay them suckers just once! Get the longer-term note unless you're rolling in mega-millions.

[Skywalk]

But what if it isn't?

ANd if you DID pay it off, you spent so long taking extra money you could have been saving and investing and now you've got your house all right.

And not much else. Seems like a shoddy deal, especially when you add in all the maintenance and property taxes you have to pay REGARDLESS of whether you 'own' the property or not.

[Texas Eagle]

But you could just as easily lose your job in the 13th year of a 15 year note and have a higher payment to come up with than if you have a bad spot. True. That's why doing what I did is better. By borrowing money at the 30 year rate and making the 15 year payments, my minimum monthly payment is lower than if I had just gotten a 15 year loan.

So if I lose my job 13 years into my 30 year mortgage, I can just default to what would be my normal monthly payment.

[Fred Mertz]

How much will your monthly payment be on a 10 year loan?

I hate revealing personal info here, but since you axed....I'm paying about $500 right now per month on my 30 year....I'd pay less than $400 on a 15 year....I haven't figured out the 10 year yet on $50K principal.

[Mannaggia l'America]

But you're house is paid off, right?

Yes. Will the college take some shingles or a window or some carpet instead of cash?

[Pete'sWife]

Our first home had a mortgage of 14.625%.

It was 1979 and, yes, Jimmuh Carter was President.

Thanks, Jimmuh.

[Texas Eagle]

http://www.1728.com/mortpmts.htm

Just fill in the top 3 blanks

[Skywalk]

Yep you own your house all right, just got laid off, your house's value went up and BAM your property taxes went up but instead of having a substantial cash or liquid reserve, ya gots zilch.

And you're worse off than if you took the longer "Oh no I'm a debt serf" approach.