Paying Off Your House in 15 Years
More and more homeowners are choosing to pay down their mortgages faster than ever before–even if it means a substantial increase in their monthly payments.
Between January and June, 26% of homeowners who refinanced chose a 15-year fixed-rate mortgage, according to data from CoreLogic, a provider of financial, property and consumer information. During all of 2009, 18.5% of borrowers who refinanced opted for a 15-year term.
What's prompting the shift to shorter loans? Historically low interest rates for fixed-rate mortgages.
Homeowners are doing the math and realizing that rates have fallen enough so the increase in payment between a new 15-year mortgage and their current loan is no longer unbearable for their budgets.
The average rate on a 15-year fixed-rate mortgage was 3.86% for the week ending Aug. 26, according to Freddie Mac's weekly survey of conforming mortgage rates.
A Change in Thinking
A 15-year mortgage also acts as somewhat of a forced savings account for homeowners, given that the higher payments help a borrower pay down the principal at a quicker clip.
This is a huge shift in borrower thinking. "There was a drive a couple of years ago to take out the biggest mortgage you could and use all of the money you would have otherwise had in the house and put it into stocks and bonds–to think of your house and mortgage as part of your entire investment portfolio.
That worked for people who do investment finance for a living and are good at managing accounts. But for the average person, debt is a drag on their psyche as well as their overall budget. It now seems many Americans have reverted to the goal of paying off their house and getting rid of their mortgage.
Doing the Math
Refinancing into a shorter-term mortgage isn't a strategy for everyone, however.
Choosing a shorter term usually means you'll get a better rate–and you'll pay much less interest over the life of the loan–but a shorter time frame ramps up monthly mortgage payments.
For example, with a 4.5% interest rate on a 30-year fixed-rate mortgage of $200,000, you would have a monthly payment of $1,015, including principal and interest. The monthly payment jumps to about $1,480 with a 4% interest rate on a 15-year fixed-rate loan.
Of course, if the refinancing borrower's current 30-year loan has a higher rate, the difference between the monthly payments could be lower. Still, you should count on some increase in monthly payments.
For the most part, those who choose 15-year fixed-rate mortgages are older and have more equity and less debt than other folks. They also earn higher incomes and don't have some of the added expenses younger homeowners typically do.
People who are taking these loans are financially stable and can afford the payments, but at the same time are planning on staying in their home for an extended period of time.
The general consensus among economic advisers is, you shouldn't take on a 15-year fixed-rate mortgage unless you have substantial savings, including at least a year's worth of living expenses in liquid accounts.
It is also recommended having a debt-to-income ratio below 35%. So if you have a gross salary of $5,700 per month, for instance, your monthly debt–including any mortgage payments, taxes, insurance, homeowners-association dues as well as auto and student loans and credit-card debt–would have to be a max of $1,995 to get a 35% ratio.
Make That Extra Payment
Borrowers who don't meet those standards, or are worried about future loss of income, might be better served taking a longer-term mortgage but making extra payments on the principal to pay off the loan faster.
For instance, if you refinance a $200,000 mortgage into a 30-year loan with a 4.5% rate, and then apply $100 of the savings to the principal payment each month, you'd save $31,700 in interest over the life of the loan. And you would pay off the mortgage in 25 years, instead of 30.
What's more, you would have the flexibility of not paying that $100 in months when money gets tight. Maybe today you're feeling flush with money. Maybe you're worried in the future that income might change. With a 30-year mortgage, you have more flexibility. Shortening to 15 years is a pretty big bump in payment.
To see what your payments are on varying lengths of loans, use one of our mortgage calculators to compare payments before you decide which mortgage term is best suited to your circumstances.
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Your End-of-Summer Housekeeping To Do List
As summer winds down, you’re probably trying to squeeze in one last trip to the beach or plan your big Labor Day weekend. But as fall rapidly approaches, don’t forget about getting your house ready for the next season. Here’s a handy to-do list to help you prep your house for fall & winter.
1-Use binoculars to inspect your roof and chimney for water leaks. Look for deteriorated, missing or damaged roofing material as these can be signs of water leakage.
2-Use weather-resistant caulk to seal minor cracks on your home’s exterior, walkway and driveway before the ground freezes.
3- Sweep away long-abandoned bird nests from outdoor lampposts and behind porch and garage lighting fixtures. Believe it or not, the dry twigs can easily catch on fire from the lamp heat.
4-Before you forget, turn off your outside sprinkler system and leave all outside water taps slightly open. This allows excess water to drip from the pipes, keeping them from freezing (and cracking) in the winter.
5-Take the first step in your holiday decorating by installing hooks to your roof line. It’s much easier to do the detail work now before the weather gets icy and cold.
6-Be on the lookout for end-of-season sales. The items you’re most likely to find the best deals on right now include barbecue and gas grills, patio furniture, room air conditioners and gardening equipment.
7-Collect emergency winter supplies before demand increases and while some things are on sale. Good supplies to have on hand: candles, matches, bottled water, batteries, flashlights, shovels and a battery-operated radio. (Many of these items should already be on hand if you leave in areas that could be affected by tropical storms or hurricanes, as the season is just now reaching its peak.)
Taking the time to take care of some housekeeping items before the seasons change can save you a lot of time and money in the long run. Plus, getting these tasks done ahead of time allows you to really savor the final moments of summer.
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More Credit Card Reform: Penalty Fee Limits Take Effect
A new round of credit card rules took effect in August, including a $25 penalty fee cap, a ban on “inactivity fees” and a “one-fee limit” that prevents card issuers from piling on fees for a single event or transaction that violates a card agreement.
The new rules comprise the final stage of the Credit Card Accountability Responsibility and Disclosure Act of 2009, most of which took effect Feb. 22 of this year.
At that time, a ban on retroactive interest rate hikes became law, along with disclosure requirements that now show up on credit card statements showing how long it would take to pay of a balance on minimum payments alone.
This time around, penalty fees are the focus.
Here is a rundown on the new credit card rules that went into effect on August 22nd, according to the Federal Reserve:
Reasonable Penalty Fees:
Penalty fees have been as high as $39, but the Fed has implemented a $25 limit. In addition, you cannot be charged a late payment fee that is greater than your minimum payment. For example, if your minimum payment is $20, your late payment fee can’t be more than $20. If you exceed your credit limit by $5, you can’t be charged an over-the-limit fee of more than $5.
Exceptions to the Penalty Fee Limit:
A credit card issuer can raise the penalty fee above $25 if:
*One of your last six payments was late, in which case your fee may be up to $35; or
*Your credit card company can show that the costs it incurs as a result of late payments justify a higher fee.”
Inactivity Fees:
Your credit card issuer cannot charge you inactivity fees, or a penalty of not using your credit card.
One-Fee Limit:
You cannot be charged more than one fee for “a single event or transaction that violates your cardholder agreement." For example, you cannot be charged more than one fee for a single late payment.
Re-Evaluation of Rate Increases:
If your card issuer increases your APR (annual percentage rate), it must re-evaluate that rate increase every six months. “If appropriate, it must reduce your rate within 45 days after completing the evaluation.”
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