Debt can hold you back.
That's why we help clients work towards freedom from all consumer debt – student, auto, and personal.
Mortgage debt can be different than other debts.
A reasonable fixed-rate mortgage, with the right terms, can advance your finances rather than hold you back.
As the image below shows, mortgage rates are at their lowest point in 50 years (perhaps ever). Today might be the best time ever to ensure that your home is owned on the right terms.
At today’s rates, lock in 30-year fixed-rate financing
There are many rate and term options.
At today's rates, we focus on only one: a fixed-rate 30-year mortgage.
TERM (OR LENGTH OF LOAN IN YEARS):
When rates are low, we lock in the rate for as long as possible by using the longest term possible.
Sure, you'll pay more in interest in a 30-year mortgage than you would in a 15-year mortgage, but there are many hidden benefits. Many of these benefits occur between years 15 and 30.
For example, each year your payment will stay the same (fixed), while most other expenses like milk and bread increase in cost. If you can freeze part of your living costs, do so for the longest term possible. This uses the concept of inflation to your advantage. As time passes, your payment is fixed at the same dollar amount. But, since your dollar buys less and less as time passes, your payment technically costs you less and less as time passes.
The lower monthly payment of a 30-year mortgage (versus a 15-year mortgage) can also provide breathing room if your finances get tight.
You can always choose to pay a 30-year mortgage like a 15-year mortgage (but you probably shouldn’t). The opposite is not true.
Take advantage of interest rates when they are low. Usually, we aim for a fixed rate under 5%. Today, rates under 3% are available.
Those that itemize deductions on their tax return can deduct mortgage interest paid. This lowers your true interest rate even further.
TYPE OF RATE:
We like fixed rates, especially at today's rates. Variable rates or split rates (fixed than variable/floating) are usually marketed at a lower rate, but they can quickly turn around and burn you as interest rates rise.
At today’s rates, don’t rush to pay off a mortgage
Although we argue over ‘socializing’ the American health care industry, we long ago ‘socialized’ the mortgage industry in order to encourage homeownership.
If you can obtain a 30-year mortgage with a fixed-rate rate under 5% on one home (your primary residence) don’t rush to pay down this unique, tax-payer-funded government gift.
Doing so runs the risk of becoming “house rich”, and “financially poor”.
If you're "house rich" you might own your home free and clear. No mortgage. No rent. This feels great!
Yet, we've seen many in this position struggle financially.
Rushing to pay off a mortgage usually occurs at the expense of other financial priorities, such as building up cash and other investment savings. Have you maxed out your retirement savings and emergency fund? Are you debt-free otherwise? Have you funded insurance policies and, if needed, college savings?
When most of your cash savings are plowed into your mortgage, the cash becomes trapped in your home. You cannot access it. Enter the “reverse mortgage” product which is a sign of this complication.
Also, with too much of your net worth trapped in one concentrated place - your home - financial success (or failure) can be closely tied to your local market. While this could have a good outcome, it is risky.
When should you consider refinancing?
Refinancing takes out a new loan for the same dollar amount owed on your current loan, but at a lower interest rate. This lowers the cost of the loan by lowering the amount of interest you pay over time.
It is vital that when looking into refinancing, you consider the costs, such as mortgage origination fees and closing costs. Read more on the costs here. Make sure it is worth the switch.
If you plan to move soon, it may not make sense to pay these costs.
Lowering your rate by 1%
A refinance might be right for you when you can get approximately 1% lower than your current rate.
ELIMINATING PRIVATE MORTGAGE INSURANCE
If your home was purchased when you had a poorer credit score or a lower amount for a down payment, you were likely placed with a loan that required private mortgage insurance (PMI).
PMI results in a higher monthly payment for insurance to protect the bank in the event of a foreclosure.
Once you have established equity in your home, you may be able to refinance to remove the PMI and obtain a lower monthly payment.