Ask The Money Coach

Posts Tagged ‘Bankrate.com’

Q: Is it a Good Idea to Pay Extra on My Mortgage for an Early Payoff? How Much Do You Advise to Put Every Month to Pay a $300,000 Mortgage Down in 10 Years?

A: If you can afford to do it, yes, it is a good idea to pay extra toward your mortgage and pay your house off early. The one caveat I would say, however, is to make sure that you’ve taken care of what I call “the financial basics” first. This means paying off excessive credit card debt, having at least a three month cash cushion set aside for emergencies, creating a will, and protecting yourself with both life and disability insurance. Once those things are taken care of, by all means, start throwing extra money at your monthly house note to own your home free and clear as soon as possible.

Paying Down a $300,000 Mortgage

You asked about paying “down” a $300,000 mortgage, and I assume you meant just that – paying a big chunk of it down, and not paying it completely off. If you acquired your home anywhere from 1 to 10 years ago, and got your standard 30-year mortgage, paying it off in just 10 more years would mean you’d likely have to nearly double your current payments. On the other hand, if you’ve owned the home for some time, and want to accelerate your payments so that you can, indeed, have it paid off entirely in 10 years, then that may be financially doable without such a huge increase in payments. One big variable in all this is also the interest rate on your home loan. Since I don’t know how any others facts outside of the payoff amount – $300,000 – and your desired time frame (10 years), I’ll briefly describe two payment options, and then point you in the right direction for further information, where you can run multiple scenarios based on your exact circumstances.

Mortgage Payments are Always Front-Loaded

According to Bankrate.com, to pay off in 10 years a $300,000, 6% home loan means your monthly payments would need to total $3,331. By comparison, a 30-year mortgage, also for $300,000 at 6%, would have payments of $1,799. But remember, mortgage payments are very front-loaded, so that you pay more in interest charges in the early years, as opposed to paying down the principal on the loan. In fact, after 10 years of paying on a 30-year mortgage, you’re likely to have knocked off just 13% to 17% of your principal balance. It typically takes about 17 to 19 years of paying a mortgage before your payments start being mostly applied to principal instead of interest.

Use Online Mortgage Calculator

Use this mortgage calculator on Bankrate.com: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx.

It will allow you to play around with different payoff scenarios for your mortgage. By doing so, you’ll see how many tens of thousands of dollars you can save by applying extra payments to your mortgage, and paying it off sooner rather than later.

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Q: I Have an ARM at 6.5% That Adjusts in August. My Credit Score is 610. Can I Refinance into a Fixed Rate Loan with My Score Or Should I Consider Another ARM?

A: As of January 2010, fixed-rated mortgages dropped to about 5%, a very attractive rate for homeowners thinking about refinancing. However, those very low rates are going to the banks’ very best customers: those with pristine credit (i.e. FICO scores above 740) and individuals with at least 20% equity in their homes. For everyone else, expect to pay a higher rate. Since you said you do not plan to be in the house much longer (3 years at most), an ARM may not be a bad move. According to BankRate.com, 5/1 Adjustable Rate Mortgages are currently averaging 4.36% nationwide, compared with a rate of 5.14% for 30-year fixed rate mortgages nationwide.

Calculate Your Break Even Point

Use the mortgage-refinance calculator on Bankrate’s site (http://www.BankRate.com) to run a couple of different scenarios. Also, talk to a mortgage broker or to your existing lender about what rates and terms you’d likely qualify for in the current market. They will be able to tell you your “break even point.” That’s the number of months it would take you to recoup the cost associated with refinancing your home. For example, if your refinance costs $9,000 to get done, but it saves you $200 a month (because you got, say, a 5.25% interest rate), then your break even point would be 45 months – or 3 years and 9 months. As long as you live in the house that long, it will have been worth it for you to refinance. If you live in the house for a shorter period of time, then you basically lost money on the refi.

Consider FHA Alternatives

If you don’t like what you see in the breakeven analysis, and you simply want the security of a fixed rate loan – which is the better deal for most people right now – then think about getting a government insured mortgage. Among conventional lenders, I suspect that your 610 credit score would put you in the bottom tier of customers, if you can get approved at all. But that wouldn’t necessarily be the case with a government-backed FHA loan, which would certainly be a mortgage option to consider. FHA loans are based on your debt-to-income ratio, and not your credit score. But a lot of lenders who do FHA loans are imposing their own credit score requirements for these loans, even though the government doesn’t. If you don’t meet their minimum credit score cutoff, lenders (and soon the government) will charge you a higher rate. See the Housing and Urban Development’s website (http://www.hud.gov) for more information on FHA loans.

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