Should You Pay Your Mortgage Off Quicker


Earlier this week, The Seattle Times published with tips for "paring down your mortgage" siting that many home owners are opting to pay off their mortgages quicker:

The portion of borrowers refinancing in January who took 15-year mortgages rose to 29 percent from 11 percent two years earlier, according to the most recent data available from CoreLogic, a real-estate information firm in Santa Ana, Calif. Mortgages with 30-year terms accounted for 52 percent of refinancings in January, down from 80 percent in January 2009.

The share of cash-in refinancings reached a record 44 percent in the fourth quarter, according to data from Freddie Mac dating to 1985. While the share fell to 21 percent in the first quarter as mortgage rates climbed, it was almost double the quarterly average over the past 26 years.

I've noticed a much healthier, financially responsible "attitude" with my clients over this past year. Instead of home buyers wanting to know "how much" they can buy, they want to know what a certain payment will qualify them for.  There's a definite trend where folks are buying less than what they could be preapproved for.  

Many are considering shorter terms, as the Seattle Times article mentions, including the 15 year and 10 year amortized mortgage (which is being heavily advertised on the radio).  I caution to make sure you have plenty of reserves if you opt for a shorter term mortgage…you can always pay shorten the term of a 30 year mortgage and have the flexibility of only making the 30 year amortized payment; but should you find yourself needing more cash flow in the future, you cannot make a 30 year payment on a 20, 15 or 10 year amortized mortgage.  And should you find yourself in a financial squeeze in the future, you may not qualify to refinance into a longer term.

30 Year Fixed:  4.625% (apr 4.790) with a principal and interest payment of $2057.

20 Year Fixed:  4.500% (apr 4.679) with a principal and interest payment of $2531.

15 Year Fixed:  3.750% (apr 3.995) with a principal and interest payment of $2909.

10 Year Fixed:  3.500% (apr 3.808) with a principal and interest payment of $3955.

The savings over the life of the loan is great…but if you're having to refinance to obtain cash back or to reduce your payment or if you're relying on your credit cards, you may want to seriously consider a longer term mortgage.  You can reduce the interest you pay by making additional payments towards your principal.

Cash-in refinances are continuing to be popular as many home owners are wanting to take advantage of the lower rates that are available with conforming and conforming high balance loan limits.  This has become more of a phenomenon with the loan limits set to be reduced from $567,500 to $506,000 as of October 1, 2011 in the Seattle area for both FHA and Conforming loans and possible reduced lower effective January 1, 2012.

Here's an example of the difference between current conforming high balance and jumbo mortgage rates with a 30 year fixed in greater Seattle:

Conforming High Balance loan amount of $567,500:  4.750% (apr 4.871) principal and interest payment of $2,960.

Non-Conforming Jumbo loan amount of $567,501:  5.375% (apr 5.486) principal and interest  payment of $3,178.

With a cash-in refinance, it's important to weigh the lost opportunity of the cash you're investing into your home (you may not have access to it for quite a while) along with the monthly savings of the refinance.

Adjustable rate mortgages are also gaining in popularity.  If you're not planning on retaining your home for more than five years, it's worth at least comparing the savings.  However if the idea of having a mortgage that will adjust in five, seven or ten years makes you uncomfortable, then you should stick with a fixed rate product.

10/1 ARM:  4.125% (apr 3.911). Interest rate fixed for 120 months with caps of 5/2/5 and a principal and interest payment of $1,930.  The highest the rate can adjust on the 121st payment is 9.125% and the lowest is 2.25%. 

7/1 ARM:  3.625% (apr 3.537). Interest rate fixed for 84 months with caps of 5/2/5 with a principal and interest payment of $1,852. The highest the rate can adjust on the 85th payment is 8.625% and the lowest is 2.25%.

5/1 ARM: 3.250% (apr 3.359). Interest rate fixed for 60 months with caps of 5/2/5 and a principal and interest payment of $1,714. The highest the rate can adjust to on the 61st payment is 8.250% and the lowest is 2.25%. 

If you have questions or are interested in obtaining a mortgage for a home located anywhere in Washington state, please contact me!  Nothing makes me happier than helping my readers.

Rates quoted above are effective as of July 1, 2011 at 11:45 a.m. and may change at anytime. Rates are based on 740 or higher credit scores with an 80% loan to value for a purchase or rate-term refinance in Washington.

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