Posted: March 29th, 2010 | Author: Joe | Filed under: Real Estate, spending | Tags: Mortgages, Refinancing, Saving Money, Tips | No Comments »
A while ago, my wife and I were looking to sell our house and upgrade to a larger home. Our family was outgrowing our starter home. We had made some pretty dumb decisions when we bought that home. We had no idea what we were doing. We didn’t shop around for the best mortgage, we simply used the mortgage broker recommended by the real estate agent.
Things were different when we bought our next (and current) home. I wrote about some of the things I learned the first time around in 4 Tips For Applying For a Mortgage.
Another dumb thing we did was refinancing about a year into owning the home. We had just had our 1st baby, and had a tough time making ends meet so when the broker called and said we could cut our monthly payment by “as much as $50!”, well we jumped on that deal.
Of course, that $50 set us back a year on paying off the loan, not to mention all the extra financing involved because we rolled the refinancing cost into the new loan.
That’s not to say that refinancing your home is a bad idea. It just depends on the circumstances. A year into the loan, with not much lowering of the rate (we shaved about 0.25% off our rate) doesn’t make much sense, unless it’s trading an ARM for a fixed.
Well, back when I was shopping around for the best mortgage rate I contacted lendingtree.com. I ended up using a local bank instead, but lending tree still sends me their newsletter from time to time.
This week’s newsletter had a link to their article 4 steps to evaluate your current mortgage loan.
I thought I’d share some thoughts on their list, but feel free to read the full article on your own.
Here’s the gist of their list of when it makes sense to refinance your mortgage.
- You have an adjustable-rate mortgage (ARM)
If you have an ARM, and the terms don’t specify a prepayment penalty then it may make sense to refinance to a fixed rate loan. The prepayment penalty may be costly if you refinance, since you are in essence making one, big prepayment on the entire loan itself.
- Your current mortgage rate is considerably higher than current mortgage rates.
I interpret “considerable” to be about a percentage point or more, also known as 100 basis points or more. I just don’t think it makes good sense to lengthen your loan (which refinancing does) to save less than a percentage point. You’re better off making an extra payment or more every year. You’ll save more interest AND own your home free-and-clear sooner.
- You expect to be living in your home for another 7 years or more.
The Lending Tree article mentions doing the math to make sure you stay in the house past the point at which you break even and make up the cost of the refinance, but there are other market conditions involved. If you stay to the break even point, and then decide to sell you may still lose out if the market hasn’t risen. 7 years may not be enough time for your home to appreciate, but it seems like a point at which the odds are in your favor.
Lastly, it doesn’t always make sense to refinance your mortgage. For example, I don’t think it makes sense to refinance my mortgage because the change in rate isn’t enough and I have my own plan to pay the mortgage off sooner anyway, which will save me more in interest payments over the long run.
Whether or not you will really save money by refinancing your mortgage is more than just using a mortgage calculator to see what your new monthly payment is. You need to think big picture too, as I laid out in my explanation of why I’m not refinance my mortgage.
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Posted: March 24th, 2010 | Author: Joe | Filed under: Debt, Tips | Tags: Auto loans, Credit Cards, Credit score, Debt, Mortgages, Student Loan Consolidation, Student Loans | No Comments »
It’s a sad fact of modern life that unless we are diligent we are bound to end up with a multitude of debts, so it’s no wonder that people often feel overwhelmed when considering which debt they should pay off first.
This topic is usually centered around credit card debt and often pits philosophies and formulae against one another. For example, many people espouse the Dave Ramsey snow-ball method, while others decry it as too simplistic.
What this post isn’t about.
This post is not about the snow-ball or any other method of repayment. This isn’t about the nitty gritty of how to weigh various balance amounts and interest rates against each other to arrive at the optimum payoff order of your credit card balances. In fact, this isn’t even about any specific type of debt.
What this post is about is how you should go about classifying your debt and which category of debt should be paid first and why.
Naturally the best course of action is to keep your debt to a minimum, if you can’t avoid it all together. But to help you get there sooner, consider this list of importance when paying off your debt.
#1. IRS debt.
IRS debt is the most important to pay off, hands down. You simply don’t mess with Uncle Sam. If you fail to pay your taxes, the government can garnish your wages and seize your home and property. If you find yourself owing the IRS back taxes, you can go the tax relief route to help clean up your mess but it’s best to avoid the situation altogether.
#2. Credit card debt & personal loans.
Credit cards and personal loans carry the worst interest rates and fees. The longer you carry debt of this type, the longer you will be working for things you bought in the past and the longer you will wait until you have the freedom of your paycheck back. It’s that simple.
#3. Car loans.
Auto loans get us to what is known in the industry as secured debt, sometimes called “good debt.” The reason is that there are often tax deductions associated with it, and the terms are more favorable because there is something that could be repossessed if you fail to pay. While you don’t get to deduction the interest on your car loan, you will typically see a lower rate than on credit cards.
#4. Student loans.
Student loans are typically the lowest interest rate you can get, and if they’re not you can usually use a student loan consolidation company to lower your interest rates significantly. Besides, most graduates end up paying their student loans until they retire anyway. 
Mortgage debt is about the best debt you can have. Don’t confuse that with a mortgage being a good thing. Most people would like to own their home “free and clear” if given the option, just for peace of mind. But there are arguments that say a mortgage is a good thing to have. I’m not personally so interested in that thought because I don’t know very many people who simply do not have the luxury of paying off their mortgage in less than a decade, and that’s with serious stick-to-it-ivness. Most homeowners will have a mortgage and while it may not be the best thing in the world, it’s far from the worst. You get to deduct the interest payments on your taxes, and it allows you to buy a much nicer house than you would likely be able to afford without one. The trick is finding the happy medium and what works for you.
The importance of order.
That’s assuming you are paying off each of those debt obligations. Interestingly, if you are looking at a situation in which you cannot afford to pay all of your creditors and you might end up defaulting on the obligation, the order is a bit different.
In the case where you have to pick and choose which category of debt gets paid and which does not, the order of importance looks more like this:
- #1. IRS Debt.
The IRS can garnish your wages and seize your property. You could even do jail time if your situation is serious enough.
- #2. Mortgage.
Don’t pay your mortgage, and you lose your home and all the money you spent on it over the time you owned it. That’s a serious hardship and setback. It also does very bad things to your credit score.
- #3. Student loans.
The interest rate is usually more favorable than other forms of debt, but failure to pay your student loans at all will lead to having your wages garnished and being hit with serious fees.
- #4. Car loans.
Failure to pay your auto loan will result in your car being repossessed. This is bad for your credit score as well as your freedom of mobility.
- #5. Credit card debt & personal loans.
Failure to pay your credit card and personal loans can lead to a lot of lost money in interest charges and fees, as well as ruining your credit score but there’s no loss of property and a small chance of having your wages garnished.
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Posted: March 12th, 2010 | Author: Joe | Filed under: Debt | Tags: Bankruptcy, Debt, Mortgages, refinance | 1 Comment »
Don Taylor, over at Bankrate.com, recently received a question about Bankruptcy and mortgage refinancing that I think is a poignant reminder of how serious bankruptcy is and how long it can follow you.
The reader writes to Mr. Taylor and pleads his case:
We have about 60 percent equity in our home. We both have credit scores above 700 and both have good incomes. We recently tried to refinance our home mortgage loan at a lower interest rate but, because I filed for bankruptcy three years ago (with the discharge completed two years ago), the lender wasn’t willing to approve a loan with me as a co-borrower. (My spouse was not involved in the bankruptcy.)
The reader goes on to state that they have been in the home for 19 years, presumably with the same loan and bank. Mr. Taylor does remark on being surprised that the bankruptcy is still preventing them from refinancing their mortgage, so maybe they haven’t held this loan for the full 19 years. This point isn’t stated one way or the other.
Regardless, the fact remains that the bank seems to have more stringent standards than simply a good credit score. Many banks have underwriting standards that delve deeper in the borrower’s credit history – especially since the sub-prime mortgage meltdown. Apparently, this bank still weighs the bankruptcy more heavily than the current credit score.
Of course, the bank recommends that the reader’s spouse be the borrower, and that they can then get mortgage insurance to pay off the home in the event of the spouse’s death. This is not surprising as banks often make far more on selling loan insurance than they do on the loan transaction itself.
The bottom line is that a bankruptcy can have far greater and longer lasting impact than you may think, and that rebuilding your credit score alone may not be enough to offset the black mark on your history.
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Posted: February 5th, 2010 | Author: Joe | Filed under: Economy | Tags: Economy, Housing, Mortgage Rates, Mortgages, news, Recession | No Comments »
It looks like there’s a “mini-wave” of mortgage refinancing that’s been pushing the rate of applications up to a six week high. But the home buyer tax credit doesn’t expire until the end of April, and that doesn’t apply to refinancing anyway, so why the rush?
The rush may be due to the anticipated end to the Federal Reserve MBS purchase program at the end of Q1, 2010. The MBS program is the mechanism by which the Fed has been buying mortgage-backed securities from banks, helping to keep mortgage rates near historic lows.
For example, the average 30-year mortgage rate has been near 5% for almost a year.
According to the Mortgage Bankers Association, their mortgage index jumped 21% last week, as a result of a 26.3% increase in demand for refinancing while purchase loan requests were up 10.3%.
It’s not all rosy news though, the report also states that the borrowing cost was up 0.40% from the record low set last March. Analysts expect both mortgage rates and mortgage costs to be headed higher throughout the year.
Source
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