Tag Archives: 15 Year FRM

Retiree Real Estate Mistakes

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Realtor.com quoted me in 5 Major Mistakes That Retirees Make With Real Estate. It opens,

You’ve worked hard year after grueling year and, finally, retirement is on the horizon. There’s nothing ahead for you but lazy days of relaxation and idle time to pursue those back-burner hobbies. Hey, you’ve earned it!

But if you haven’t planned ahead, those golden years could be full of stress—fraught with unknowns and major decisions to be made. And one of the biggest, most stressful aspects of retirement is, you guessed it, real estate.

Do you downsize? Buy a second property so you can make like snowbirds and fly south for the winter? Keep the home where all your family’s memories were made? While there’s no one-size-fits-all solution, there are some general pitfalls to avoid.

Here are five of the biggest real estate mistakes experts see retirees make.

1. Failing to ‘audit’ the situation

It might come as a surprise, but many retirees forget to assess their current real estate situation to make sure it meets their future needs, according to David Reiss, professor of law at Brooklyn Law School.

“Most people are on autopilot when it comes to their home: ‘It has worked for me up to now, so I assume that it will work for me going forward,’” Reiss says. “The mistake they make is that they do not realize that their future selves are very different from their current selves.

“As we age, our ability to do all sorts of physical things worsen—shoveling, climbing ladders—decreases,” he adds. “So it makes sense to assess your housing situation at regular intervals.”

Even if you plan on keeping your home, there are questions you should ask yourself: Should you make adjustments to your home so you can age in place? Does it make sense to refinance into a 15-year mortgage in order to pay off what you owe more quickly while paying a lower interest rate? Should you access some of the equity that’s built up in the house in order to supplement your retirement income?

“All of these options have pros and cons,” Reiss says. “It’s worth talking them through with someone whose financial judgment you trust.”

Low, Low, Low Mortgage Rates

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photo by Martin Abegglen

TheStreet.com quoted me in Top 5 Lowest 15-Year Mortgage Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and the stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates?

How to Get a Low Rate

Low mortgage rates can play a large factor in homeowners’ ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000. Having a top notch credit score plays a critical factor in determining what interest rate lenders will offer consumers, but other issues such as the amount of your down payment also impact it.

A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here’s a quick rundown of what the numbers mean – a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent. Think carefully before canceling a credit card with a long, positive history, but decrease your debt. One of the biggest factors which impact your credit score is your credit utilization rate.

Many potential homeowners focus only on the interest rate or the monthly payment. The APR or annual percentage rate gives you a better idea of the true cost of borrowing money, which includes all the fees and points for the loan.

The origination fee or points is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge.

Homeowners who are able to afford a 20% down payment do not have to pay private mortgage insurance (PMI), which costs another 0.5% to 1.0% and can tack on more money each month. Having at least 20% in equity shows lenders that there is a lower chance of the individual defaulting on the loan.

Choosing Between 15-year and 30-year Mortgages

Obtaining a 15-year fixed rate mortgage instead of a traditional 30-year mortgage means homeowners can save thousands of dollars in interest. One drawback of a 15-year mortgage is that consumers will be locked into higher monthly compared to a traditional 30-year mortgage or a 5-year or 7-year adjustable rate mortgage, “which could put the squeeze on homeowners when times are tight,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Many households would not benefit from a 15-year mortgage because it “does more to limit their financial flexibility than to enhance it,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

“Locking into higher monthly payments makes the household budget tighter and for what?,” he said “So you can pay down a low, fixed rate loan? On an after tax, after-inflation basis you’re essentially borrowing for free.”

McBride suggests that this strategy does not bode well for homeowners, especially if they are not paying down their higher interest rate debts and maximizing their tax-advantaged retirement savings options such as IRAs and 401(k)s.

“Even then, you might be better off investing your money elsewhere than tying up more of your wealth in the most illiquid asset you have – your home,” he said. “Just 28% of American households have a sufficient emergency savings cushion, so why the hurry to pay off a low, fixed rate, tax deductible debt. Money in the bank will pay the bills, home equity will not.”

The current economic situation has pushed down rates with 15-year mortgages becoming “relatively more attractive” than even 5-year adjustable rate mortgages (ARMs) over the last year, said David Reiss, a law professor at the Brooklyn Law School in New York. Last week Freddie Mac announced the average 15-year mortgage rate was 2.74% and the average for the 5-year ARM was 2.75%.

“These rates are virtually the same,” he said. “A year ago, the 15-year was relatively more expensive than the 5-year by about 0.16%. If you can swing the higher principal payments for the 15-year mortgage you will be getting about as good an interest rate as you could hope for.”

Savings from a 15 Year Mortgage

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MONEY CASE 5

MainStreet quoted me in Choosing a 15-year Mortgage Can Save You Thousands of Dollars. It opens,

Matt DeMargel and his wife, Misti, never considered obtaining a 30-year mortgage, because the amount of interest they would pay would equate to 60% of the cost of their house.

Instead, the public relations executive opted for a 15-year mortgage when he bought a 2,542-square foot home in Kingwood, Texas, a suburb of Houston.

“I hate debt, even the so-called ‘good kind’ of secured debt,” he said. “We are working to pay off our mortgage in five years. Even if we pull that off, we will have paid more than $30,000 in interest over that five year period.”

Dave Ramsey, a personal finance expert who is host of a radio show, said he always advocates choosing a 15-year fixed rate mortgage when buying a home.

“When you have a 15-year mortgage, it costs just a few dollars a month more,” he said. “It’s only 20% to 25% more per month than the traditional 30-year mortgage, but it saves you 15 years of your life in debt.”

The amount of money homeowners can save from paying less interest can easily help fund a large portion of their retirement, but determining whether a 15-year mortgage is right for your household can be more complicated.

Benefits of a Shorter Duration

Depending on your goals and lifestyle, a 15-year fixed rate mortgage is the quickest way to owning your home. If one of your plans is to receive a much lower interest rate, then choosing a shorter interval will meet your objective, said Brook Benton, a vice president at Atlanta-based PrivatePlus Mortgage.

“A 15-year loan is typically the lowest fixed rate you can obtain,” he said. “If you like the security of a fixed rate and the payment fits into your budget, this product is a home run.”

Paying off a mortgage quickly is a priority for some homeowners who detest shelling out more money for interest. If a consumer borrows $200,000 over 30 years at 4.17%, he or she will pay just over $150,000 of interest, said Craig Lemoine, an associate professor of financial planning at The American College of Financial Services in Bryn Mawr, Pa. A homeowner who opted for a 15-year note would pay a slightly lower interest rate of 3.29% and his total interest payment drops to around $53,600. (Even a 15-year note at the same rate of that 30-year loan would generate just under $70,000 in interest.)

“A reduction of lifetime interest paid can be quite attractive,” Lemoine said. “The lure of a shorter note is the vision of a paid-off home in 180 months. The emotional satisfaction is tantalizing.”

While you receive the benefit of a lower interest rate, a 15-year mortgage commits consumers to higher payments. If it fits within your overall budget, then paying more each month should not be a concern.

This route is also advantageous for homeowners who are refinancing their mortgage or contemplating downsizing to a less expensive or smaller home, said David Reiss, a law professor at Brooklyn Law School.

Homeowners who have lived in their house for a few years and want to refinance their mortgage should consider a 15-year note, because they have likely “paid down a significant amount of principal,” Reiss said. A combination of a lower interest rate and the possibility that the homeowner is now earning a higher salary means the monthly payments could be manageable, he said.