Mortgage Questions

[Turquesa]

Excuse my ignorance.

1. When do you consider it worthwhile to refinance your mortgage? If interest rates are one percentage point lower than when we locked in 6 years ago, should we give it a go? What are the "rules," if there are any?

2. Do mortgage companies ever charge pre-payment penalties? We're on a 15 year, fixed rate loan. I've been paying extra on the principle but haven't seen them punish me with any fees yet.

3. Should we ditch the escrow? Would we save any money in doing so? I know that DH and I are perfectly capable of paying insurance and taxes on our own. The lending agent (a less-than-competent friend of my MIL) didn't tell us that we even had the option of not having an escrow.

4. This is for you Dave Ramsey fans, or anybody else with some perspective on the issue. Ramsey encourages everybody to pay off all NON-mortgage debts before stashing for an emergency fund and putting 15% of income into retirement. Why NOT pay off all of the mortgage first?

TIA!

[delightedbutterfly]

Well I think I can answer number four. Mortgages usually have lower interest rates that you other debts making it better to pay those off first. Having a liquid EF is better than paying down your mortgage because having to pull money out of the mortgage means you are then paying interest on that money and investing in yourself first is better long term as you don't want ALL of your money (especially retirement money) wrapped up in your mortgage. A small mortgage witha large savings or investment portfolio will serve better in the long run.

I get that it sounds better to pay off the mortgage and then have that money to invest but your house will only make you money when you go to sell (USUALLY and only over a long period of time) whereas investments will make you money today. I haven't read his book or followed him too closely but that is usual logic.

As for decimating yes there is a penalty but the US system works different than the Canadian one so while refinancing can be beneficial hopefully someone else can answer that.
Posted via Mobile Device

[CarrieMF]

1. When do you consider it worthwhile to refinance your mortgage? If interest rates are one percentage point lower than when we locked in 6 years ago, should we give it a go? What are the "rules," if there are any?

if you are refinancing strictly for the rate(not taking out more $) then I would refinance. 1% doesn't sound like much but if the rates go higher then it would add up quickly. here(Canada) you typically renew every 5 years. If you don't go in then it automatically renews. If it's been 6 years & you had a 5year rate you may incur penalties for going in now & not in 4 years.

2. Do mortgage companies ever charge pre-payment penalties? We're on a 15 year, fixed rate loan. I've been paying extra on the principle but haven't seen them punish me with any fees yet.

some mortgages have pre-payment penalties, others don't. Some have a penalty up to a certain amount prepaid each year. You'd have to look at your mortgage payments to find out.

3. Should we ditch the escrow? Would we save any money in doing so? I know that DH and I are perfectly capable of paying insurance and taxes on our own. The lending agent (a less-than-competent friend of my MIL) didn't tell us that we even had the option of not having an escrow.

our insurance is not part of our mortgage payments or anything, but our taxes were. When we got rid of our mortgage & got a HELOC instead we had to pay the taxes on our own. We found it harder to make sure to put that $ away each month.

4. This is for you Dave Ramsey fans, or anybody else with some perspective on the issue. Ramsey encourages everybody to pay off all NON-mortgage debts before stashing for an emergency fund and putting 15% of income into retirement. Why NOT pay off all of the mortgage first?

Waiting 15-30years to start retirement is throwing money(interest) away.

[nd_deadhead]

I would definitely consider refinancing if the interest rate was a percentage point less.

Another consideration is how long you might stay in the house. If you plan to move in a year or two, it probably doesn't make sense to refinance, because it takes a while to recover closing costs.

If you are 6 years into a 15-yr loan, and paying additional to principal, you are paying a lot more toward principal each month than interest. I would take a close look at the numbers (set up a spreadsheet with an amortization schedule) to see how much interest you would pay if you continued with the present mortgage.

Because your principal is a lot less than it was 6 years ago, you will borrow less than you did before. You could finance for another 15 years, and make larger payments to pay it off in 10, and you will probably still come out ahead (if the interest rate is a lot less).

Some mortgages have prepayment penalties; others do not. Check your original loan papers.

I would definitely ditch the escrow account. No point in letting the mortgage company use your money interest-free!

Based on the fact that you make additional payments to mortgage, you probably don't have a lot of other debt. If you do, stop paying extra to the low-interest-rate mortgage, and pay off everything else! If you need to pay off other debt, refinancing could free up a chuck of money every month to apply to other loans - but I don't get the sense from you that this is the case.

[sanguine_speed]

Originally Posted by CarrieMF

here(Canada) you typically renew every 5 years. If you don't go in then it automatically renews. If it's been 6 years & you had a 5year rate you may incur penalties for going in now & not in 4 years.

From what I've read here, I think in the US it is the norm to get a rate for a period longer than 5 years. It seems we get a bad deal up here in Canada only being able to lock in good rates for a few years and then having to pony up when our term expires and rates have gone up.
But I could be wrong about how it works down there? OP?

[Turquesa]

WOW! Thanks. I'll show all of this to DH tonight.

A couple of points to clarify:

Originally Posted by brymommy

Having a liquid EF is better than paying down your mortgage because having to pull money out of the mortgage means you are then paying interest on that money and investing in yourself first is better long term as you don't want ALL of your money (especially retirement money) wrapped up in your mortgage. A small mortgage witha large savings or investment portfolio will serve better in the long run.

That sounds compelling. However, would it make a difference if we're planning on leaving the equity alone? We'd refinance based on interest only.

Originally Posted by CarrieMF

if you are refinancing strictly for the rate(not taking out more $) then I would refinance. 1% doesn't sound like much but if the rates go higher then it would add up quickly. here(Canada) you typically renew every 5 years. If you don't go in then it automatically renews. If it's been 6 years & you had a 5year rate you may incur penalties for going in now & not in 4 years.

Oh goodness! I’ve never heard of that arrangement. You don't have fixed-rate mortgages there? We locked in at one rate. That doesn’t change until we pay off the house, unless we move or refinance before then (to answer Sanguine_Speed's question )

Originally Posted by nd_deadhead

Based on the fact that you make additional payments to mortgage, you probably don't have a lot of other debt.

Your hunch is correct. I should have clarified that our mortgage is our only debt. I take for granted how wonderful that is.

[sunnysandiegan]

Some questions to ponder....

How many years do you plan to live in this house? You generally need to stay put for a few years to make up the difference in re-fi fees (closing costs and any related fees) before the "savings" in re-financing really mean anything.

What would you do if you and/or DH were to lose your job(s) in the next year? How much cash (liquid) savings do you have and how long would it last without altering your lifestyle? How long would it last with minimum expenses?

What amount will you be able to withdraw each month once you and/or DH retire? What lifestyle would you like to have in retirement? Compounding interest is the reason to start saving for retirement in youth. The same amount of money invested at age 25, 35, 45, and 55 will yield very different amounts --- even if the investments are identical. The sooner you start, the more you will have later on. The details start getting very complicated, but the bottom line is to start retirement savings young so time is on your side to weather the ups and downs of the market (even if you don't invest directly in stocks/bonds) AND so that the interest/dividends you earn can build up and earn interest.

[SumnerRain]

I also say ditch the escrow, my lender was ALWAYS making mistakes and we were constantly having to pay more or less, or explain to the state why our taxes were late. Now I just put whatever we would pay for taxes directly into a saving account and keep my interest and know it will be paid on time. We use USAA so they do not charge us a fee for paying monthly vs. once every 6 months, so it works out well. We had to switch to another company when we rented it out because the renter has a home daycare and now we have a $6 "convenience fee" to pay it monthly. UGH. So check into that too.

When I refinanced my van to a lower rate I told them to keep my payment the same and shorten the term accordingly. The rate, which was significanly lower, shortened my term by 20 months!! Look into other rate adjustments, I have known banks who will drop your rate by .25% or more if you allow them to have it automatically withdrawn. I have a checking account at the bank who holds my loan, so I just had them draft it from an account I don't use and then keep enough to cover 2 months payments just in case. If I want them to take more, I just call them and they draft it... however we are currently snowballing a credit card, not this loan.

Dave says to pay off the mortgage later because of momentum... If you have 6 debts, he would have you pay off the smallest first because even the $200 loan to a family member that is interest free would give you more momentum to keep on working to pay off the $2,000 credit card that is at an introductory APR. If you also have a car payment at 15% for $12,000, you pay the little ones first so you don't give up. It is not about mathematical sense, it is about changing behavior.

[delightedbutterfly]

Originally Posted by Turquesa

That sounds compelling. However, would it make a difference if we're planning on leaving the equity alone? We'd refinance based on interest only.

everyone PLANS on leaving the equity alone you are in a better position. Your only debt is your mortgage and your future retirement. So the best case scenario would be to snowball a large liquid emergency fund so that there is a large cushion if one of you were to lose a job or something else major. Invest in RRSP or other high yield low risk investments and then throw as much to your mortgage as possible. Yes of course being mortgage free is something to celebrate but for many more people it is a low interest credit boost. You are in a great position but I would still make sure to save a liquid EFund and put away investment savings to work for you while you are paying down your mortgage early.
Posted via Mobile Device

[CarrieMF]

You don't have fixed-rate mortgages there? We locked in at one rate.

Yes we have fixed rate mortgages. You can go with a variable rate mortgage(at a lower interest rate usually), or a fixed rate. The fixed rates vary though. You can lock it in for 1-10 years. The best fixed rate is the 5 years though so most people take that. When those 5 years are up you can renew it(often at a lower interest rate), refinance(take out equity), or not do anything & the rate rolls over. There are fees if you do any of those too far away from teh renewal date. When we had our mortgage we had fees if we went earlier than 3 months before the renewal date.

[GatheringApples]

n/m

[VisionaryMom]

Originally Posted by CarrieMF

Yes we have fixed rate mortgages. You can go with a variable rate mortgage(at a lower interest rate usually), or a fixed rate. The fixed rates vary though. You can lock it in for 1-10 years. The best fixed rate is the 5 years though so most people take that. When those 5 years are up you can renew it(often at a lower interest rate), refinance(take out equity), or not do anything & the rate rolls over. There are fees if you do any of those too far away from teh renewal date. When we had our mortgage we had fees if we went earlier than 3 months before the renewal date.

In the US, what you are talking about is called a variable rate (ARM loan, if you read our news). People who get ARMs lock into typically 3-5 year interest rates and then have to refinance their loan after that point. A fixed rate mortgage in the US means that you have the same rate for the life of the loan, usually 15-30 years.

[A&A]

Originally Posted by Turquesa

2. Do mortgage companies ever charge pre-payment penalties? We're on a 15 year, fixed rate loan. I've been paying extra on the principle but haven't seen them punish me with any fees yet.

Some do, some don't. Completely depends on the terms you signed when getting your mortgage. It should be in your mortgage paperwork.

[formerluddite]

what we've done is go the "no cost" route, and serially refinance. a no cost loan is roughly 1/4% higher than a zero point loan. the broker pays all closing costs (appraisal, title ins, doc fees, recording fees, etc) out of the lender kickback ("yield spread premium").

if rates drop further and you refi again, or you need to move, or whatever, you are out nothing but your time (spent signing/emailing/faxing/collecting the gazillion forms and financial documents). if you stay in the house forever, you only missed the bottom rate by 1/4%. it usually takes 5 years to break even on points or closing costs, and the "overpaid" interest is deductible (while closing costs aren't), so possible even longer, in the sense of dollars earned (gotta earn $1.30, or more, to pay $1 in closing costs). if you refi or move before then, you've lost money. every time in the past 5 years i've thought rates couldn't possibly go lower, they have!

for example, we refi'd last fall for 5.25%. now our broker called in june to say he can get us 4.875%. seems crazy to refi after holding that loan only 9 mos, but that 3/8% drop will cut the monthly payment by $100! we should be signing next week. 4 loans ago, our rate was >7%.

the only caveat is each refi extended the end date of our loan (starting over at 30 years each time). but the money saved, if we apply it to the principle, would more than make up for that (currently we're throwing any extra funds at our car loan from last summer, before that we paid off my student loans). if rates stay low, in a few years i will likely be working more, and we can refi into a 15 year loan. if they rise, we can still pay it towards that goal (ie enough extra towards principle to pay it off in 15 years), and we're only ~1/2% above the 15 current year rate. the advantage of sticking to the 30 year rate at this point, is in an uncertain economy, if our income suffers, we can go back to paying the minimum without losing the house.

if you are in CA, OR or NV, fremont bank's no cost 15 year rate is 4.25% right now
http://fremontbank.mortgagewebcenter...ria.asp?PID=22

one reason not to totally pay off a mortgage until you have a big chunk of $$$ (like 50-100K) is, if a financial crisis arises, no one will loan you anything on that paid off house. plus the whole retirement deferred taxation, and company matching thing.

if you dig out your old loan papers, they should state whether you have a prepayment penalty on the form that listed the other terms. looks like this (teeny, but legible if you zoom view):
http://www.access.gpo.gov/ecfr/graph...27se91.023.gif

look at the last 2 lines, one will have a check off line for "if you pay off early you __will __will not have to pay a prepayment penalty"

and you should definitely have a choice on escrow, so long as you have >20% equity (aka "80% loan to value ratio").