A 15-Year Mortgage Can Save You $190K … but Can You Get One?

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April 8, 2015| Credit.com| Scott Sheldon|

One of the best ways to eliminate your mortgage debt is moving into a 15-year fixed-rate loan. With the average spread a full 1% compared to its 30-year counterpart, a 15-year mortgage can provide an increased rate of acceleration in paying off the biggest obligation of your life.

Can you pull it off?

In most cases, you’re going to need strong income for an approval. How much income? The old 2:1 rule applies. Switching from a 30-year mortgage to a 15-year fixed-rate loan means you’ll pay down the loan in half the amount of time, but it effectively doubles up your payment for each month of the 180-month term. Your income must support all the carrying costs associated with your home including the principal and interest payment, taxes, insurance, (private mortgage insurance, only if applicable) and any other associated carrying cost. In addition, your income will also need to support all the other consumer obligations you might have as well including cars, boats, installment loans, personal loans and any other credit obligations that contain a monthly payment.

The attractiveness of a 15-year mortgage in today’s interest rate environment has mass appeal. The 1% spread in interest rate between the 30-year mortgage and a 15-year mortgage is absolutely real and for many, the thought of being mortgage-free can be very tempting. Consider today’s average 30-year mortgage rate of around 4% on a loan of $400,000—that’s $287,487 in interest paid over 360 months. Comparing that to a 15-year mortgage over 180 months, you’ll pay a mere $97,218 in interest. That’s a shattering savings of $190,268 in interest, but there’s a catch—your monthly mortgage payment is going to be significantly higher.

Here’s how it breaks down. The 30-year mortgage in our case study pencils out to a $1,909 monthly payment covering principal and interest. Weigh that against the 15-year version of that loan, which comes to $2,762 a month in principal and interest, totaling $853 more per month, but going to principal. This is why the income piece makes or breaks the 15-year deal. Independent of your other carrying costs and other credit obligations, you’ll need to be able to show an income of $4,242 a month to offset just a principled interest payment on the 30-year fixed-rate mortgage. Alternatively, to offset the principled interest payment on the 15-year mortgage, you would need an income of $6,137 per month, essentially $1,895 per month more in income, just to be able to pay off your debt faster. As you can see, income is a large driver of debt reduction potential.

What to do if your income isn’t high enough

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

Lenders are going to consider the minimum payments you have on all other credit obligations in the following way. Take your total proposed new 15-year mortgage payment and add that number to the minimum payments on all of your consumer obligations and then take that number and divide it by 0.45. This is the income that you’ll need at minimum to offset a 15-year mortgage. Paying off debt can very easily reduce the amount of income you might need and/or the size of the loan you might need as there would be fewer consumer obligations handcuffing your income that could otherwise be used toward supporting a stable mortgage plan.

Can you borrow less?

Borrowing less money is a guaranteed way to keep a lid on your monthly outflow maintaining a healthy alignment with your income, housing and living expenses. Extra cash in the bank? If you have extra cash in the bank beyond your savings reserves that you don’t need for any immediate purpose, using these funds to reduce your mortgage amount could pencil very nicely in reducing the 15-year mortgage payment and interest expense paid over the life of the loan. The concept of the 15-year mortgage is “I’m going to have to hammer, bite, chew and claw my way through a higher mortgage payment in the short term in order for a brighter future.”

Can you generate cash?

If you can’t borrow less, generating cash to do so may open another door. Can you sell an asset such as stocks, or trade out of a money-market fund in order to generate the cash to rid yourself of debt faster? If yes, this is another avenue to explore.

You may also want to explore getting additional funds via selling another property. If you have another property that you’ve been planning to sell such as a previous home, any additional cash proceeds generated by selling that property (depending upon any indebtedness associated with that property) could allow you to borrow less when moving into a 15-year mortgage.

Are you an ideal match for a 15-year mortgage?

Consumers who are in a financial position to handle a higher loan payment while continuing to save money and grow their savings would be well-suited for a 15-year mortgage. The other school of thought is to refinance into a 30-year mortgage and then simply make a larger payment like you would on a 25-year, 20-year or 15-year mortgage every month. This is another fantastic way to save substantial interest over the term of the loan, since the larger-than-anticipated monthly payment you make to your lender will go to principal and you’ll owe less money in interest over the full life of the loan. As cash flow changes, so could the payments made to the loan servicer, as prepayment penalties are virtually nonexistent on bank loans.

There is an important “catch” to taking out a 15-year mortgage—you also decrease your mortgage interest tax deduction benefit. However, if you don’t need the deduction in 15 years anyway, the additional deduction removal may not be beneficial (depending on your tax situation and future income potential).

If your income is poised to rise in the future and/or your debt is planned to decrease and you want to have comfort in knowing by the time your small kids are teenagers that you’ll be mortgage-free, then a 15-year loan could be a smart move. And when your mortgage is paid off, you’ll have control of all of your income again as well.

Proximity to retirement is another factor borrowers should consider when carrying a mortgage into retirement isn’t ideal. These consumers might opt to move into a faster mortgage payoff plan than someone buying a house for the first time.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well. You can check your credit scores for free on Credit.com every month, and you can get your free annual credit reports at AnnualCreditReport.com, too.

Before You Refinance, Look Into Loan Modification

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Realtor.com| Craig Donofrio| Link

For months now, we’ve been telling you to take advantage of lower interest rates by refinancing. But you know what? There’s another option to consider as well: loan modification. Wait, isn’t loan modification what distressed homeowners used to get through the post-2008 housing crisis? Well, yes, but it’s more than that. Here’s the lowdown, and whether it’s the right choice for you.

OK, what’s the difference? 

If you refinance your home, you’re replacing your old mortgage with a new one, whether to take advantage of lower interest rates or to reduce your monthly payment. This can be done by your current lender or a new one. You can choose a loan that’s similar to what you currently have—or something completely different. As always, your creditworthiness, equity, and loan type play a role in determining your rate.

When you get a loan modification, on the other hand, you’re tweaking your existing loan from your current lender.

Again, this used to be an option just for people struggling to make their payments—lenders figured that some money is better than no money. But even if you’re not falling behind, you might be able to get a modification in your favor—even reducing interest rates.

That’s right, your lender might—might—be able to give you a lower rate for a one-time flat fee.

That sounds like a deal almost too good to be true. Why would a bank lose thousands and thousands of potential dollars in interest for a relatively small fee? Tom Pasqualini of Hudson United in the hamlet of New City, NY, says it’s a client-retention tactic—it prevents you from refinancing through another bank. It’s also “the lowest-cost solution for a rate/payment change for a consumer loan they are servicing,” he says.

The availability of this service is subjective to each lender, says Pasqualini. “Conservatively, [it’s] 50-50 if they offer the service.” With so many private lenders all over the country, you’ll just have to ask yours.

How much it’ll cost you

According to Carlos Jaime, owner of CTC Brokers & Associates in Corona, CA, one-time fees can range from $1,200 to $2,500. Some modifications don’t cost a thing.

But there won’t be any hidden fees, which is good. “When you elect to modify a loan, there can be no changes other than the rate of interest associated with the loan,” says Pasqualini.

If you refinance, remember, you’re getting a whole new loan—at whatever rate and monthly payment you agree to. If you have a no-cost refi and the closing costs aren’t paid by the lender, then the closing costs are rolled into the loan or are “bought out” by your accepting a higher interest rate.

There’s one thing that loan modification can’t do, but refinancing can: write someone in or out of a mortgage. So if you’ve gotten married or divorced, and want to add or remove a name from the loan, you’ll want to refinance, not modify.

Use caution and run the numbers

Be careful what kind of modification you choose. Unlike a good refinance, certain types of loan modification can trap you in surmounting debt.

Here’s how it works. Let’s say you get your lender to agree to an interest-only loan repayment period of five years, which reduces your monthly payment by $500, with the remaining balance tacked on to the loan. You’ll be paying $30,000 less over five years—but you won’t have saved that sum, you’ll still owe it. That $30,000 will be calculated into the loan, ultimately increasing your monthly payments by more than you paid before the modification. If you ask your lender for an extension and get one, you could be setting yourself up for trouble down the line.

In fact, a recent study found certain modification programs, such as the Countrywide program, actually induced strategic defaults, so make sure you fully understand any modification before agreeing to it.

Elysia Stobbe, branch manager of NFM Lending in Jacksonville, FL, says modifications can also come with teaser rates, just like mortgages.

“It can be a 2% teaser for the first year, then adding 1% each year for a few years, and then staying fixed in the 5% range,” says Stobbe.

Ask your lender

If you want to find out your loan modification options, you first want to identify who owns your loan (not the servicer). You can see if it’s Freddie Mac or Fannie Mae by using their websites. Fannie Mae and Freddie Mac both offer the government’s Home Affordable Refinance Program and the Home Affordable Modification Program. Both of these programs have broader income and credit requirements and may lessen your monthly payment and rates, if you’re eligible. Contact your lender for their requirements.

Even if your lender can’t offer you HARP or HAMP, it may have another option to help you out.

Making the choice

Choosing between a modification and a refinance can be tricky. Jaime says the first stop should be to see if you’re eligible for HARP for a refinance because of the program’s relaxed income requirements. If your lender doesn’t offer it, you’re ineligible, or you’re too underwater for a traditional refinance, it’s time to look into modifications. Consider the following:

  • How long will you live in the home? If you’re not planning on staying for the long term, it might be smarter to sell the house, if possible.
  • If you’re too far behind or too underwater, going into a foreclosure or short sale might be the better option. “If you’re delaying the inevitable and it’s unlikely you’re never going to reach that [equitable] value again, or take you forever to pay it back, you may be better off to cut the ties,” says Jaime.
  • How much does the refinancing cost, and how long will it take to break even?

But if you can just lower your rate for a one-time fee, you’re in the clear. It’s cheaper than a refinance, and if you’re moving in the next few years, just calculate your break-even point.

For example, let’s say a modification on your $250,000 30-year fixed-rate mortgage lowers your interest rate by 1%, dropping your rate to 5%. That would save you $157 a month—$2,512 total—and you would break even in 16 months. If you were going to move before then, it’s not worth it.

Now let’s say you want to refinance using the same example. But since closing costs are involved, it’ll take you $5,000 to reduce your interest rate. You’ll still save $157 a month, but it’ll take 32 months to break even. But if you want to write someone out of the mortgage or change the loan type, this could be your only option.

Bottom line? Ask your lender. Call and see if it can reduce your rates and about what modifications or refinancing options it can offer you.

Credit problems may not be a problem for borrowing anymore…

Wells Fargo Joins Lenders Lowering Credit Standards


Photographer: Patrick T. Fallon/Bloomberg

A Wells Fargo & Co. branch in Hermosa Beach, California.

U.S. banks are easing credit standards in search of a safe and profitable middle ground after an era of reckless home lending gave way to the stiffest rules in decades, putting a damper on the housing recovery.

Wells Fargo & Co., the biggest U.S. home lender, two weeks ago cut its minimum credit score for borrowers of Fannie Mae-and Freddie Mac-backed loans to 620 from 660. The step followed moves by smaller lenders, such as the U.S. unit of Canada’s Toronto-Dominion Bank, which lowered down payments to 3 percent without requiring mortgage insurance for some loans.

Banks ratcheted up borrowing requirements after the most severe housing crash since the Great Depression, preventing as many as 1.2 million loans from being made in 2012, according to an Urban Institute paper. Lenders rode a wave of refinancing until a spike in borrowing costs last year gutted demand, forcing the biggest banks to cut more than 25,000 mortgage jobs. Now they’re removing barriers to mortgages for some borrowers in hopes of reviving a shrinking market.

“We threw the baby out with the bathwater because we had to,” said Rick Soukoulis, chief executive officer of San Jose, California-based lender Western Bancorp. “From there, you start to inch back. If you keep selling only what isn’t selling, you’re just dead.”

Mortgage Standards

In March, credit standards were the loosest in at least two years, according to a Mortgage Bankers Association index. The measure, based on underwriting guidelines, rose to 114 from 100 when it started in 2012. The index would have been at about 800 in 2007, meaning credit was eight times looser that year, before standards were tightened.

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