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Mortgages

Buying a house is probably the biggest purchase you’re going to make. If you’re going to buy a home soon, taking the time to get a financial plan in order can be a huge step in helping you reach your goal. It can also provide you a way to make home ownership a relatively enjoyable experience.

The key to saving money on your mortgage is to get the best possible mortgage for your family’s finances. Learn how to save tens of thousands on interest and pay off your mortgage sooner.

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Just When We Thought Our Bills Were Going Down

It looks like one of our bills will be increasing starting this month. Imagine the joy on our faces when we got an update from Wells Fargo about our mortgage payments for the next year. It looks like we’re having an increase. Having a fixed rate mortgage doesn’t necessarily mean that our payments to Wells Fargo remain the same through out the loan. Why? Besides sending in the mortgage payment, we’re also sending in money to escrow.

What is Escrow? How Does It Work?

When you get a mortgage, if your down payment is less than 20% your lender will typically have you open an escrow account to handle your property taxes and homeowner’s insurance. This amount is estimated and then broken down into monthly payments, added to your mortgage payments. In addition to those bills, our escrow also takes care of our mortgage insurance premium (MIP) that we owe as we got an FHA loan on the house. Instead of cutting checks to several places, Wells Fargo makes these payments on our behalf as they are due.

The disadvantage of not doing this ourselves is that we don’t earn any interest on the money as it’s being saved. However looking at the balance it’s not really a huge deal. Perhaps down the line, we may want to take care of those bills ourselves and get a small bump in our savings. For now, though, Wells Fargo is handling it.

Looking at Our Payment Options

After reviewing the changes, I noticed that the increase is due to a slight increase in our property tax bill and the new premiums for our home insurance. As you may remember, we were reevaluating our home insurance coverage to make sure we were getting a good deal and found that we were under-insured for our house should a fire happen. The insurance wouldn’t be enough to cover the interior rebuild.

The total increase for our escrow account portion would be around 12%.   Wells Fargo is giving us two options:

  • Pay the shortage now and our mortgage payment goes up.
  • Spread the additional payments out through the year. 

So either way, our mortgage increases. To keep our cash flow steady we went with the latter option and I already adjusted our bill pay service to the new amount.

Thoughts on Mortgage Payments

I’d like to hear from you about how your mortgage payments are going? How frequently have your payments changed through the years? How big or small are the changes?

Get Your Money Right Before Buying a House

Today’s post is based on a response to a comment I made on another personal finance blog. With The Debt Movement in full swing (sign up for a chance to win money to pay off some of your debts), I’ve been stopping by and checking out the site to get motivated and inspired by the debt reduction posts. One post, called, Is Your Goal to Get Out of Debt or To Stay Out of Debt, grabbed me and I went ahead and read the whole piece.

As you know, we’ve paid off debts like credit cards and the car loan. We’re now working on paying off the last student loan. Our goal is to go ahead and get out of debt, which includes paying the mortgage off much earlier than the 30 year loan term.

Anyways, I decided to leave my comment about staying out of debt. I got a notification that someone replied. It was Jarim Person-Lynn, the author of the post. What he asked me got me thinking:

Thanks so much! If I may ask, are you purchasing real estate in cash as well with you and your husband’s awesome dual income?

Huh. To be honest I never really considered that option (I also never considered our dual income awesome, but now I do). While I do think that buying a house with cash is a fantastic option to have, I don’t think that getting a mortgage is in itself bad. I do, however, believe that getting into heavy, unmanageable debt for a place is bad.

For those looking to buy a house with a mortgage, I wanted share some advice based on our experience (the good and the bad).

Want to Buy a House? Think 15 Years or Less

If you want to buy a certain house and you can’t afford a 15 year fixed rate mortgage on it, then you shouldn’t buy it. There I said it. Even if you plan on getting a 30 year mortgage on a plan, give yourself a buffer when you’re house hunting.

I’m going to tell you something that most people may already know, but during the process of buying a house they somehow forget – lenders are in it for the money. When they give you numbers, they tend to give your higher estimates because that increases their cut. However at the end of the day, it’s YOU that has to pay this mortgage every month. You have to look at the whole picture and plan accordingly.

We want to have this buffer because if you want a life outside of the mortgage you have got to include a safety margin into your calculations.

If you don’t have a buffer then you’ll be living paycheck to paycheck for decades with that mortgage around your neck.

Check Your Numbers (Twice!)

Now it’s time to pull up a spreadsheet or fire up an online calculator. We’re going to look at the your finances as if we were the lender and THEN we’re going to look at them as the ones who actually foot the bill. This is another way to make sure you have a good safety margin on your mortgage loan amount.  We’ll look at the Debt to Income Ratio and the Loan to Value Ratio.

Debt to Income Ratio

Having a high amount of debt can ruin your chances of getting a loan. Lenders want to know that you can make these payments for years down the line (so they get paid) and your debt to income ratio is one thing they analyze. Your debt to income ratio is calculated by simply taking all your debt (student loans, credit cards, car loans, etc) and dividing that amount by your income.

Now conventional wisdom said that if your debt to income was 36% or less then you were good. Let’s be honest though – do you think that works in the REAL world, where bad stuff happens? Seriously, do you think that you could afford a bump in the road if your debt was that high? I don’t.

I’ve seen, heard, and read about people who have lost their homes houses because a financial setback that snowballed into a mess. Please do yourself a big favor and look beyond 36%. Try to shoot for 25% or less with the ratio and make sure you’ve paid off high interest debt like credit cards off before you buy a home.

Loan to Value Ratio

The loan-to-value (LTV) ratio is basically the mortgage loan amount you’re hoping to get divided by the appraised value of the property you’re considering to buy. Don’t buy more house that you can afford. Try to see if you can get a mortgage that is at least 80% or less of the house’s value.

Think Bigger on Your Down Payment

Aim big when you’re figuring out a down payment for a house. The advantage of a bigger home down payment  is that it will reduce your monthly mortgage payment. If you put 20% or more, you can avoid paying private mortgage insurance. You can also get a better deal on your interest rate if your down payment is larger.

If you two are having a hard time getting a down payment ready while taking care of your other financial obligations, you may want to hold off on getting a home. Buying a home can be a great experience, but it can also be a nightmare. If you’re not in a position to buy a home, don’t stress out. Renting can be a wise choice for many people (either for the short term or the long term, depending on the city you live in). Don’t be impatient; wait for the right time.

Your Thoughts on Buying a House

I’m calling all current and past home loaners to please help first time buyers out. What advice do you have about qualifying for a mortgage? Did you rely on the estimates from the lenders or did you run the numbers yourself? Did you receive any pressure from your real estate agent to get a more expensive house? If so, how did you cope with it?

Photo Credit: Oracio Alvarado

Are Bi-Weekly Payment Programs a Good Option?

By Tali Wee of Zillow

Paying off a mortgage can be overwhelming for homeowners. Many options and recommendations exist for homeowners who want to pay their principal faster than the terms of their loan in order to save money on interest. Although savings are desirable, paying more than the mortgage payment isn’t feasible for all homeowners. In fact, just paying the monthly mortgage can be challenging for some.

Many homeowners enroll in bi-weekly payment programs to assist in paying their mortgages promptly, with extra funds toward their principals and less stress.

Interest is the price homeowners pay for borrowing money to purchase their homes.  For the first several years of the loan, the majority of monthly mortgage payments go directly toward paying off interest.  In order to get out of debt sooner, homeowners need to pay extra funds toward the balance of their principals during those beginning years.  The faster the principal is paid, the less the homeowner pays in interest, reducing the overall cost of homeownership. One way to pay the principal off faster is to pay two half-payments every two weeks, rather than a full payment each month.

What Is a Bi-Weekly Payment Program?

Bi-weekly payment programs are offered by lenders, loan providers and third-party services to collect mortgage payments every two weeks, rather than monthly. Each payment is for half of the monthly mortgage cost. Splitting the mortgage into two smaller payments can be more feasible for some homeowners.

Enrolling in a bi-weekly payment program is not free. These programs generally cost an initial fee for activation and then an additional fee upon payment every two weeks. The enrollment fees range anywhere from $150-$500 and payments cost $5-$20 each.

What Are the Benefits of Bi-Weekly Payment Programs?

Despite the cost, bi-weekly payment programs are more manageable for some homeowners. The payment schedule corresponds with standard paycheck schedules. These programs work well for homeowners who don’t excel at budgeting, have little expendable income or struggle remembering to pay their mortgage on time. As money is earned it’s sent to the lender, without the risk of overspending before the mortgage is due.

Most bi-weekly plans require automatic fund transfers to prevent late payments. These scheduled electronic transfers assist homeowners to stay on track with their mortgages, prevent late fees and protect their credit.

Bi-Weekly Payment Programs Reduce Interest Costs

Because bi-weekly payment programs require half-payments every other week, homeowners end up making 26 half-payments each year. Compared with the traditional 12 monthly payments, bi-weekly mortgage payers make 13 full payments per year. The additional full payment goes directly toward paying down the mortgage’s principal. The sooner and faster the homeowner pays the principal, the less overall interest is paid. Also, making one additional payment toward the principal each year can decrease the length of the loan by years.

 Is a Bi-Weekly Payment Program a Good Option?

The choice to enroll in a bi-weekly payment program is heavily related to a homeowner’s payment preferences, circumstances and financial priorities.  The decision to pay off a mortgage early is the primary indicator of bi-weekly payment plans being selected by homeowners. Borrowers have numerous opinions revolving around the choice to pay off a mortgage ahead of schedule.  If getting out of debt and paying off the mortgage as soon as possible is a top priority, then perhaps a bi-weekly program is perfect to help manage that goal. However, if the homeowner has multiple other financial goals to focus on, then bi-weekly payments may not be the best use of their money.

Some factors that may influence a homeowner to not pay the mortgage off ahead of schedule are: student loan debt, savings for children’s education, plans for short-term home-ownership, low income, low interest rate or more lucrative investment options.

Alternatives to Bi-Weekly Payment Programs

If homeowners decide not to pay off their mortgages early, they may still benefit from making reduced mortgage payments twice a month. Some loan providers accept two half-payments each month, free of charge. These are not considered bi-weekly payment programs and do not accumulate an additional mortgage payment per year. If smaller payments upon payday are more feasible than one large monthly payment, check to see whether the loan servicer allows such arrangements.

Homeowners who are interested in paying off their mortgages early should consider alternatives to bi-weekly payment programs. Simply make an extra payment directly to the principal balance each year. When homeowners receive unscheduled income such as a commission check or tax refund they can apply it toward their principal without previously arranged savings plans.

Another method is to pay 1/12th of a monthly payment in addition to each month’s payment. This additional payment adds up to one extra full payment per year. The sooner the principal balance reduces, the less total interest is paid. Therefore, 12 small additions monthly are more beneficial than one full payment at the end of the year.

To avoid the costs of an official bi-weekly payment program, homeowners can devise their own bi-weekly system. Create a savings account and transfer half of a monthly payment to it with each paycheck. When the full mortgage payment is due, write a check out of the savings account. This financial management plan can eliminate the stress of budgeting for homeowners choosing to pay on or ahead of schedule. An automatic payment plan can be arranged with most loan providers to avoid late payments.

The decision to use bi-weekly payment programs should be made by the individual homeowner with all financial priorities and options considered.

Mortgage Payoff Progress for 2012

It’s the end year, so I’m reviewing a bit of financial progress we’ve made. Today I want to look at our mortgage on our home. Like our monthly net worth reviews, we looking over the numbers to what we’ve done to see what worked and what didn’t.

This system has worked well for us as we’ve been tackling financial goals. Carl Richards, a certified financial planner, noted how couple can keep each other in the loop with money.

Write the decisions down so you can track your progress. A benefit of monthly meetings is that you can assess how you’re doing, but it requires keeping track of what you’ve agreed to do. Write things down and revisit them during your meeting. Have you made progress? If not, what needs to happen? The list can be a great way to manage your monthly conversations. Don’t be afraid to use it and hold each other accountable….

More than once, I’ve been in client meetings where it’s clear that couples are having their first discussion on big decisions — kids’ education, saving, even retirement. Without fail, either one or both individuals is surprised, if not shocked, by their partner’s opinion on a topic. So from what I’ve seen, it seems obvious that the more conversations you have about money before you have to make major financial decisions, the happier you’ll be in your relationship.

Besides chatting with each other regularly, having this information on Couple Money is our way of keeping each other accountable. So let’s get started……

We originally got our mortgage at the beginning of 2010 with a fixed interest rate of 5%. When we were getting qualified for a mortgage we decided to base it solely on my husband’s net income to make sure that the payments would be affordable. It’s worked out well for us so far as we had a little bit of room in our budget to pay a bit more on it on a regular basis.

It’s been a fun couple of years and we’ve been sending in extra payments to our mortgage lender, both on a monthly basis and a portion of some of our tax returns and bonuses  How did we do? Let me show you – I made a lovely pie chart just for this post :) paying off mortgage 2012
The pie chart above shows two things – the amount we’ve paid off so far and the mortgage balance we have left. This chart doesn’t reflect how much the house is worth, it’s simply our progress on the mortgage loan. We’ve paid off 16% of our mortgage (~$19,000) in 3 years, meaning that we have 84% and 27 years left to pay it (but we’re hoping it will be much sooner than that).

For those tracking all of the numbers, it comes out to:

  • Original Mortgage: $123,239
  • Current Balance: $103,435

Some people have asked why we decided to pay off our mortgage. After all the rates are low and we could use that money to invest for retirement, getting higher returns. While I’ve explain a couple of our reason, I wanted to go into a bit more detail today.

Why Pay Off Our Mortgage Early?

There are a couple of reasons why we paid extra on the mortgage, some financially based, others emotionally based. As with many financial decisions with couples we’re trying to be smart with our money and work with what makes us comfortable.

One big reason we were paying down our mortgage faster than the 30 years scheduled is because we’re looking to save a larger amount of money long term. When lenders offer a mortgage they use amortization to allocate payments of the life of the loan. What that means for borrowers is that in the beginning of your mortgage, most of the money go towards paying interest. As the mortgages draw to a close, the payments increasingly towards the principle owed.

For example, if a couple bought a house for $250,000 and pays it off in 30 years (@3.45%) as scheduled, then when the loan is completed that couple will have paid a total of $401,631.29. That means they would have paid $151,631.29 just in interest!  If that couple decided when they got that same mortgage they’d paid an extra $100/month, then the loan would be paid off in 26 years and they would save $22,800.19.

That’s why if you’re able to accelerate your mortgage payments with extra money going towards principle, you can cut years off your mortgage and save tens of thousands of dollars (or more depending on the size of your mortgage) by avoiding the extra interest. We had started doing that as soon as we sent in the first payment.

Another reason for sending in extra payments on a fixed rate 30 year mortgage instead of taking a 15 year loan is that we wanted some flexibility with our budget should our cash flow change due to job loss or my business slowing down. We could’ve afford the 15 year loan, but we’d have less wiggle room in our budget.

Besides the financial reasons, we admit that we were paying down on our mortgage because our risk tolerance. Paying down the mortgage quickly is also about our own peace of mind. We also don’t want to limit our cash flow for the full 30 years by carrying our mortgage the full length.

That doesn’t mean we’re not investing. We are currently contributing towards our retirement accounts,  a 401(k) and an IRA. However, while we are investing for retirement, we also wanted to a get a guaranteed return and paying extra on our mortgage does that in a way.

We’re happy with the progress we’ve made, but now we’re going to be shifting gears a bit for 2013. It’s time to pay down the other debt in our lives – the student loan.

Now Focusing on Student Loans

While we still want to pay off our mortgage early, starting next month we’re going to now take that extra monthly payment and direct that towards paying off the student loan. It’s our last non-mortgage debt and we’d like to get that done and out in the next couple of years.

Right now the scheduled payments for the loan is around $150/month. By re-allocating and scheduling the extra mortgage payments towards the student loans, we’re have a minimum of $325/month going towards the loan. That’s not counting micro-payments sent in as My Financial Reviews‘ income grew. My plan is to continue to build that income and use it for the loan. If we get a tax refund next year, a big portion will be allocated for it.  Our hope is to pay off the student loan in 2 years or less.

Looking back at our progress with our mortgage, I feel encouraged that we can make this goal together. It will take a bit more effort to reach this goal, but it’ll be worth it. Once this student loan is paid off, we’ll go back to the mortgage and paying extra on it.  We’re still looking forward to eliminating this debt within 15 years (or less). With no student loan to worry about, that will be additional money we can use for the mortgage.

As always, I’ll be sharing our progress here, most likely with the monthly net worth reviews. If you have any suggestions, please share them below in the comments!

Thoughts on Paying Down Debts

I’d love to hear from you about your progress with eliminating debts this year and your plans for next year, especially your mortgage.  For those who’ve done the calculations, how much money and time will you save if you continue on your mortgage pay off plan? What motivated you to work on your debts? How do you stay on track?

Disclosure: Information sourced from Genworth Financial

Photo Credit: Horia Varlan

Refinancing Your Mortgage Can Still Be a Great Option

One of my favorite things about writing here on Couple Money is receiving email from you. Whether it’s questions or stories, I love hearing your thoughts on finances.

Refinancing His Mortgage 3x in 3 Years

This week I received an email from a reader who has successfully refinanced their mortgage a few times, saving money and time as they’ve reduced their loan lengths as well.

I have actually refinanced my house 3 times in 3 years(sounds crazy, but each time the math worked out even with early payoff).

For my original mortgage I had a 30 yr, 5% with Citi. I decided to finance with Provident into a 4.25% for a 20 year loan.  Afterwards I did another refinance, this time the interest rate was 3.625% and it was for 15 years.

My most recent (and I am sure last refinance, I went again with Provident. I got a 15 year fixed rate mortgage with a 3% APR. In addition, Provident paid a portion of closing. I think we were out about $1,300 for closing.

So happy to hear that a reader has taken advantage of the low rates and has also slashed their mortgage loan from 30 years to 15 years!

Should You Refinance Now ?

Deciding on whether or not you should go ahead and refinance your current mortgage depends on numbers. Here are a few things to keep in mind:

  • Your Current Mortgage Interest Rate
  • Years Remaining on Your Current Mortgage
  • Interest Rate on Proposed Refinance Loan
  • Term on Proposed Refinance Loan
  • Estimated Closing Costs

Looking at all the costs can be a huge help in knowing what’s the right call for you. If you want to see what rate you can qualify, try lenders like Quicken Loans. They typically have competitive interest rates.

Thoughts on Refinancing Your Mortgage Right Now

I’d love to get your thoughts. How many of you have refinanced recently or thinking of refinancing soon?

Note: Some minor editing was done on the email to organize it to be blog post ready and keep certain details private. 

Photo Credit: ansik