I imagine that with home values dropping, a lot of us are upside-down on our loans but “shouldn’t” be. Technically I have $10K or so equity but if my house won’t sell for its original price, it’s moot anyway, right? Once again, my procrastination, laziness, and general oblivion save me from making a phone call to check out refinancing, woo hoo!
I wonder if the tax collector is giving us any breaks. :dubious: If our homes are valued lower, we should be paying less in property taxes, right?
Is there a mathematical formula for calculating the real return?
[tangent]What’s up with the all-interest loans? Here’s a link to BoA’s menu of mortgages, with a 5 year “Interest Only” loan. IIRC they used to have a 10 year Interest Only. Who would want or need one?[/tangent]
Actually, earlier this year I did receive a letter from my county’s tax assesor. The property tax payment I just made was lower because of this whole fiasco.
Using big round approximate numbers. (and other fictions like “0% down” and “real estate always appreciates” and “the interest on an interest only mortgage will be the same as on a 30-year fixed”)
Imagine a $100,000 house, at 5% interest on a 30-year fixed mortage, the payment is about $550/month for 30 years.
On a 10-year, interest only 5% 30-year fixed, for the first 10 years, the payment is about $450/month for the first 10 years. After which, the payment is around $650/ for the next 20 years.
Obviously, the interest only mortgage is less now, and more in the future. A person may think “in 10 years, I’ll be making more money, I will be able to afford the difference.” So why not wait 10 years to buy when they have more money? Because, say the house appreciates 2%/year - in 10 years, that same house is ~$120,000, the monthly payment on that house with a 30-year fixed, 5% interest $675/month, the person has spent 10 years not living in that house and it will be 10 years longer to pay it off than if he’d gone with the interest-only.
Or a person might say “4 times a year, I get a huge bonus, the rest of the time I can pay $450.” And so, they pay in a pattern of $450 for two months, $750 for on month on a cycle for 10 years. Then for the final 20, they’ll only need to pay $550/month.
Interesting, thanks for the reply. I thought it meant “We’ll loan you the money, let you pay interest only…then you’ll have to arrange a whole new mortgage.” I didn’t realize it was part of a longer mortgage.
You did a little better than me. I negotiated a variable rate of .65 less prime this past August, but I’m still very happy to be paying only 2.85%. However, I’ve been making as many extra payments on the principle as my budget allows because I have an ugly feeling rates will skyrocket 2 or 3 years down the road if inflation kicks in.
Interesting. I hadn’t heard they were doing this but it makes sense. Not gonna fall for that unless they lock me in at 2.85%. I think I could live with that.
Believe me, I’m keeping a very, very close eye on economic indicators. The thing is, the way it works (and this may be true of all variable rate deals, I don’t know) is that I’m making the same payments every two weeks - the extra just goes straight to principle. So even if interest rates climb back above the level they were at when I signed - 1.25% higher - we’ll have made a huge amount of hay while the sun was shining.
I was doing that for the last few years but then I developed a medical condition that made it unlikely that I would be able to work as long as I’d planned to. I stopped paying the extra principle and started banking it then. I figure that if things get really tight the bank isn’t going to care how much I’ve paid ahead if we can’t make a current payment and now I have a year’s worth of payments saved for a rainy day. Now that I’ve had to go out on early retirement just as the economy took a nose dive I’m really glad that I did it. We’re fine for now but if my partner got laid off we’d be in a financial mess.
“wouldn’t be committed” - that’s a big factor in deciding whether to go for a 15 year loan!
I played around with some numbers but got very different estimates for principal payoff for the 15 year loan than you did (I tried guesstimating what loan amount would create a current principal payment of 220, after 6 years at 5.75%) - my figure showed a new principal amount of about 600 a month your first month with the refi, which I suspect is incorrect.
If the rate weren’t so much lower, I think you’d definitely be better off simply paying extra on the current loan. Since it is, I suspect it may be worth refinancing (you might opt to refi for a 30 year loan, which would lower your required payment, then try to pay the 15 year figure every month you have the cash to do so).
How I looked at things some years back when (in our old house) we considered switching to a 15 year loan:
A (current payment): Balance (in 60 months) minus Balance (now) = increase in wealth in 5 years.
B (current loan, 150.00 larger payment): Balance (in 60 months with higher payment) - Balance now, minus (60 * 125.00 = 7500), = increase in wealth.
C (new loan, payment = 125 higher than current): Balance (in 60 months) - Balance now, minus (60 * 125 = 7500), minus 5000, = increase in wealth.
Option B doesn’t yield a huge improvement - a couple thousand net. If you tossed in that 5,000 up front, the change would be considerably bigger (maybe an extra 16,000 if my spreadsheet is right). And it’s a lot less work than a full refinance.
(can you tell I’m trying to avoid cramming for a certification test I have to take next week?).
Since I just bought a new house last summer, I don’t think refinancing is in my future. The interest rate I got was so low that even though the house is more expensive, my payments are less than in the old house (not a lot less). My old interest rate, from the '90s, was close to 8%.
But, unfortunately, the value of the house is probably also less than it was when we bought it, to the point that despite a hefty down payment we probably have NO equity at the moment.
Anyway I don’t want to go through that hassle again so soon. I figure as mortage rates go down, so goes the value of the house, so even if it got really, really low, it probably wouldn’t work.
I.e. committed to paying $150 extra each and every month. I still have 24 years of commitment if I do nothing.
Like I said, I’m probably upside down on it. If housing prices were appreciating or at least if I could get what I paid for it, ok.
Have you taken the test yet (and if so, how’d you do :D)?
I’m not sure how the mortgage company handles option B. Suppose I make a regular payment, and at that point, the principal remaining is $100,000. If I then send an additional $150, does that mean the principal is reduced to $99,850? Will they add it into the spreadsheet and recalculate my payments from that date forward? I imagine I’d keep sending the same pmt and maybe once a year they’d change it. Or maybe they’d just wait till I got close to paying off the principal and give me a call.
If you’ve got a fixed-rate loan, they won’t say “OK, you’ve paid 10,000 in extra principal so far, so now your payment is 30 bucks less starting from now”. You’ll just wind up paying it off early. My mortgage spreadsheet works under this assumption and it’s always been within pennies of what the bank says. There’s no short-term cash-flow improvement (in fact arguably you’d be slightly worse off in the very short term, as you’d be paying less interest overall therefore your tax deductions will be lower). Obviously in the long-term you’re better off because you’re rid of that mortgage payment that much sooner.
If you’ve got an ARM, then every time it adjusts (yearly or whatever), it adjusts to a new payment based on whatever the principal is as of adjustment time, so prepaying would affect the payment amount on the next aniversary, and your new payment amount would indeed be less than it otherwise would have been. At least, this has been our experience when we’ve had an ARM.
(and nope, haven’t taken the exam… that’s Friday… and it has nothing whatsoever to do with mortgages ;)).
Yeah, that sounds right. You’re basically paying the last payments if you send them a chunk of money. Looking at my amortization, if I sent them $10K, I could kick back after pmt 344, so that means the last 16 months would be paid. $10K is 16 p&I pmts, so what would I really save? If I sent $20K (about 32 p&I pmts), I’d finish after 324 pmts, 36 months early…that works out a little better .
The more you can send in, the better, but if you have a boatload of cash, um, refinancing is probably the best.
I’m not sure about this, however:
(Mama Zappa)*There’s no short-term cash-flow improvement (in fact arguably you’d be slightly worse off in the very short term, as you’d be paying less interest overall therefore your tax deductions will be lower). *
The interest wouldn’t change for the short term (current year), right? They’re still going to collect what I agreed to pay in interest for this year.
Actually, as far as I can tell (and the caveat: I’ve got a spreadsheet that calculates expected interest and principal for month N based on the principal value at month N - 1; in other words, it calculates interest month by month - AND my figures have historically matched my bank’s to within a penny or two every few months so I don’t think I’m off base), if you substitute “month” for “year” in your statement above, that should do it.
Example:
200,000 principal, 30 year mortgage, 5.75% interest. Your scheduled payment is 1167.15. Of that, the first month you’ll pay 208.81 in principal, and 958.34 in interest. Your outstanding principal will be 199,791.19. In the second month, it’s 209.82 / 957.33, third month, 210.81 / 956.33 and so on.
If in month 1 you throw an extra hundred dollars, you still pay the same interest for that month - on January 1, you’re paying interest for the money you owed in December. But your February 1 interest (since it’s on a hundred dollars less principal than expected) will be less than expected. 199,691.19. The interest on that is 956.86 - a savings of a whopping 47 cents over the 957.33 you would have paid. And your principal would be reduced by 210.29, which is 47 cents more than you’d have otherwise expected.
Throw an extra hundred bucks with your February payment, and your March payment will now 211.78 / 955.37. So that month you’re saving 97 cents in interest and paying an extra 97 cents on the mortgage.
The savings will increase, every month you do this. It looks like that loan would be paid off about 5 years early.
All along, you still have to make that 1167.15 payment, as it’s a fixed loan. I’ve often wondered if someone could go to the bank at some point and say “hey, I’ve prepaid 20,000 of the loan. I could just have it paid off earlier, but I’d like to save a little money each month right now. Could you reamortize the loan, and, say, change it from 1100 to 950 a month for the life ot the loan?”.
Right, Mama, but the bank wouldn’t be motivated to help you out. Unless you can pay off the debt, they’d want to go by the original contract. Going back to the days before computers, it was probably a real PITA to recalculate PITI. They’re going to demand their interest as spelled out intially, which means they’re going to have to report it on the tax form (1099?) as such.
The actual realization of the savings in interest should come at the end, when they have no choice but to re-calculate. Then you pay it off early and stop paying interest altogether.
I always assumed that some loans may not allow prepayment etc. for these reasons.
My county recently re-assessed all home sales from the beginning of 2005 or so to now. They did this automatically - homeowners did not need to request re-assessment. My home’s assessed value tanked by about $120,000, but my property taxes were lowered accordingly.
Meanwhile, the bank just offered to modify our “Jumbo” ARM into a 30-year conforming fixed at 4.75% Huge significance there - Jumbo fixed loans are at 8.00% currently.
While we didn’t manage to qualify for one of those “haircut” modifications under the TARP or Hope Now programs that bases the new mortgage on the current assessment, rather than the sale price, we’re still happy, especially since our next payment won’t be until March. A nice little Christmas present from the bank, and yes, I do plan to sock away what would have been mortgage payments into savings.
Yes, but of course you’d need to have a useful number for the inflation rate.
Simply, Real interest rate = (Nominal interest rate - Inflation rate)/(1 + rate of inflation). That’s out of the 2nd Edition of Financial Economics by Bodie, Merton and Cleeton.
Just to rub it in a bit, Ms Hook and moi’s total mortgage is just a tad over $1,500. It will be done and over with the February payment.
And, she just retired. After Christmas and New Year’s we are taking off in our 5th wheel and heading south for as long as we damn well feel like it.
Of course this means we’re probably closer to being dead than most of you (something of a bummer in my mind). But all in all that’s a small price to pay for freedom.
Definitely looking at it. Rates around here on a 30 year fixed conforming refi are down to at least 4.75% and I’ve seen 4.5% advertised. Right now I’m at 5.25%; a refi makes sense and the point & closing costs would be paid for in less than two years by the lower rate (it’d cut my mortgage payment by ~$300/mo). Since I’m already used to paying X each month (I pay my mortgage plus extra principal) I’d keep paying X and just pay the house off earlier (even a one year difference in when the mortgage is done works out to my advantage, compared to investing the upfront cost of refinancing).
My broker gave me rough numbers on a 4.75% refi and I’m going to see if I can go lower than that. I’ve done my math a few dozen times and can’t see a way that it does not work to my advantage substantially.
I still have 24 years of commitment if I do nothing.