Core Financial Values

Encourage Owning "Free and Clear"

Posted on Sunday, May 24, 2009

FINALLY the mortgage industry is reporting an increase in 15 year fixed rate mortgages. Let's face it, the main reason any of us would get a 15 year loan over a 30 year loan is because we want to own our home free and clear as soon as possible. What an amazing concept!

Granted 15 year mortgages carry lower interest rates than their 30 year sister loans (generally about a quarter of a point less) but overall the payments on a 15 year mortgage tend to be bigger than those on a 30 years since the borrower is paying more principal with each payment monthly in order to have the loan paid back in half the time. The payment on a $400K 15 year loan at 4.375% interest is $3034 a month compared to a comparable 30 year loan payment which today would be around $2056 a month.

But come on folks, paying off principal is not a "cost." It more akin to taking one asset (cash) and converting it into another asset (home equity). Sort of like a forced savings account.
PLUS if you factor in the overall savings in interest between a 15 year and a 30 year loan you can practically pay for your kids college tuition! In the above example, the interest saved by choosing a 15 year over a 30 year loan is a whopping $194K!

New 15 year mortgages increased from about 40K in Jan to about 75K in Feb. And the dollar volume more than doubled again from Feb to March from about $7.5 billion to about $16 billion.

One thing to consider, if the 15 year loan will make it really difficult for you to make that larger payment and may put you at risk of not being able to pay it, think twice. An alternative is to take the 30 year loan and make extra payments against principal. There are programs available on line to calculate how often you will need to make the extra payment to put you in the same position you would be in with a 15 year loan. But again, if you can swing it, "GO 15."

Washington should be encouraging this type of decisions making by giving us all more incentives to do it. Maybe special tax write offs for folks who elect to pay of their loans quicker or owe their homes from and clear. Maybe bailout money to help make the rates on 15 year loans even lower or annual payments to rewards people who keep current on them. Maybe taxes on cash out refinance funds to disuade people from using their homes like ATMs. Or higher pay structures for mortgage brokers who sell more 15 years loans (or conversly, take the broker who sell the riskier loans - anything to dissuade them from pushing those higher products that generally generate more money for them). Until then we'll need to remind ourselves that Going 15 is just the right thing to do.

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My husband and I are nearing retirement. Three years ago he changed jobs and had to exercise some options within 90 days. I advised him to exercise them and pay down the mortgage. It was almost enough. A year later we had saved enough to pay off the balance of the mortgage, about $20,000. I called the mortgage company and got the biggest run-around. The clerk lectured me about how I can just do this myself and there were all these disclosures, what was I rolling it into, and so on. He found it UNIMAGINABLE that this was a straight payoff and not some sort of refi. I told him that all I wanted was a payoff figure and where to send the check. I was so furious that I hung up on him. I went over to my local bank's branch (the affiliate of the mortgage company) and got the platform officer to assist me. Within five minutes we had an amount, he transferred the funds, and I was done. I received the satisfaction document not too long after that. I'm passing this on as an anecdote that supports how much pressure and single-minded thinking there was during the purchase/refi boom. There was only 'one way to go,' unless the individual was strong enough to look at the numbers and swim against the current. We made our decision based on wanting to prepay as much of our housing expenses as we could to reduce cash outlays during retirement. I wanted to hedge against the nightmare scenario of having a big invesment portfolio that tanked while I still owed a lot on my house (whipsawed). I thought it was better to own the home and have a smaller portfolio. Like you, I encourage people not to buy more house than they can afford. We built a smaller home in 1998 when we were in our mid-50s, keeping in mind that the costs of utilities, maintenance, and everything else would be lower. We live in a low-tax area and think we are pretty well positioned for the long term. You are absolutely right that people need to make their own decisions based on what benefits them. I've seen so many people who would have caved to the 'peer pressure' of their banker or the mortgage guy on the phone telling them about what is the cool thing to do.

Laocoon 6/15/2009
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