Why you shouldn’t pay down your mortgage faster

by The Associated Press
Published: September 17,2012 
Time posted: 4:28 pm

The impulse to pay off your mortgage more quickly than you need to is understandable, especially these days.

Interest rates are near historic lows, so it’s possible to replace a 30-year mortgage with a 15-year loan and still afford the monthly payments. Or, if you’ve already refinanced at a dirt-cheap rate, you can take those savings and pay down your principal faster.

But the allure is more emotional than financial. Mortgage debt provides great financial flexibility, and paying it down fast probably isn’t the best way to grow your nest egg.

“Generally speaking, there’s no advantage to paying down a mortgage earlier than you need to,” says Greg McBride, senior financial analyst at Bankrate.com

That’s because the interest on mortgages is low, it helps lower your taxes, and paying less every month gives you chance to reinvest the savings in more productive ways. Among the better options: paying down higher-interest credit cards, or saving for retirement.

Start with rates on 30-year mortgages. The average rate is 3.66 percent, close to the lowest level since the 1950s.

But in reality you pay an even lower rate when factoring in tax breaks. The federal government gives borrowers a break by allowing them to deduct mortgage interest from their income. And if instead of using the extra cash to pay down your mortgage you put it in a tax-advantaged retirement fund like a 401(k), your taxes are reduced even further.

Jim Sharvin, a certified public accountant with the firm McDowell Dillon & Hunter in Torrance, Calif. says if you are thinking of paying down the principal of a mortgage more quickly than necessary — either by switching to a shorter-term loan or sending extra principal payments to the bank — consider first doing the following:

* Pay down all high-interest debt, like a credit card. It’s the first priority because it’s very expensive debt, and it has no tax or other financial benefit.

* Build a cash cushion to cover unexpected expenses or loss of income.

* Bolster your retirement savings by putting the maximum amount allowed by law into a tax-sheltered plan such as a 401(k), a 403(b), or IRA. This also reduces your taxes.

* Fund a college savings program such as a 529 plan for your children, especially if you live in a state with an income tax. These programs shelter the money from state and local income taxes.

Once these priorities are taken care of, the next step is a matter of preference.

You could take the money you borrowed at 3 percent and try to reinvest it in a way that earns more than that. If you have time to ride out ups and downs of the market, 3 percent should be relatively easy to beat.

Or you could pay down your mortgage quickly. If you are just going to park your money in money market funds or certificates of deposit that yield less than 3 percent, it makes sense to pay down that mortgage debt. And it sure would be nice to have no mortgage when you retire.

There are other situations where it’s smart to pay down a mortgage early.

The first scenario is when you’re trying to eliminate the cost of private mortgage insurance, or PMI. That’s the insurance you must carry if you put down less than 20 percent on your home. It makes sense to speed up payments on your principal until you’re allowed to drop the insurance.

It’s also good to pay down your mortgage if you don’t have the discipline to reinvest extra money wisely. Handing the money to your mortgage company is one way to protect you from yourself.

Even if paying down a mortgage fast is the best choice, there are smarter ways than opting for a 15-year loan. That’s because the shorter term locks you into a higher payment, and that can become a burden if money gets tight.

A 30-year loan gives you options. If find yourself with extra money, then pay down the principal as aggressively as you like. But if you’re short, scale back to the regular monthly amount. That flexibility is probably worth the slightly higher interest rate on the 30-year loan these days, Sharvin says.

To compare a 15- and 30-year mortgage, consider this example: One homeowner with a $200,000 loan chooses a 3.75 percent 30-year mortgage, which costs $926 per month. Another chooses a 3 percent, 15-year mortgage, which costs $1,381 per month.

The homeowner with the 30-year loan ends each year with $5,460 in savings from lower payments and a tax break of about $770. He puts all that money into a 401(k), saving himself an additional $1,560 in taxes. That’s a total annual savings of about $7,800. If he earns a 5 percent return over 15 years, the homeowner will have accrued $170,000.

The homeowner with the 15-year loan will have no extra savings after 15 years. But then his mortgage payments will end. He’ll try to catch up, but he’s starting from so far behind that by the time 30 years are up – and both loans are paid off – the homeowner with the 30-year loan will have $124,000 more in savings.


The Iron Eagle Realty Team's mission is to assist you, our client, in the sale and acquisition of real estate properties in the state of Idaho, specifically the Boise Idaho Real Estate Market. Whether you are buying or selling a home, whether it is a foreclosure, short sale or equity property, we handle our customers and clients with empathy and honest truths so they can make informed decisions as they advance in the process of buying and selling real estate that meet specific needs.

PS: We've Helped More Buyers and Sellers than 99.8% of any Local Realtor
Click Here to Search 24/7 for The Best Real Estate Deals in Boise!Click Here to Download Our Free "Selling Your Home" Pre-Listing Plan! Click Here to Pre-Qualify for a Loan Online!

Regards, Michael Hon, REALTOR®CEO, The Iron Eagle Realty Team
Associate Broker, Silvercreek Realty Group
Certified Short Sale Specialist®
Investment Property Consultant
Direct: 208.919.0458 Office: 208.939.9033 Fax: 208.514.1422
www.IronEagleRE.com Michael.Hon@IronEagleRE.com

Here’s More Evidence That Home Prices Have Hit Bottom

By Nick Timiraos
Wall Street Journal Blogs

Home prices in July were up by 3.8% from one year ago.
In each of the last three years, home prices have increased in the spring and summer, when more people are buying homes, before giving back all of those gains and then some in the fall and winter, when activity cools.

But it is beginning to look like that might not happen this year, absent a major stumble for the economy.

Home prices in July were up by 3.8% from one year ago, the largest year-over-year jump in six years. Moreover, prices have shot up by 9.6% from February, when they registered their lowest levels of the housing downturn, according to CoreLogic CLGX +0.32% data released Tuesday.

This adds evidence to the case that U.S. home prices may have hit bottom earlier this year. Even though prices will soften in the autumn, “we have a much better supply and demand dynamic” than in previous years, said Mark Fleming, chief economist at CoreLogic.

So when people say they believe home prices haven’t reached a bottom—that this year’s seasonal gains will be wiped away by January or February of next year—here’s the relevant question: Will home prices fall by 9.6% in the next six months?

Anything, of course, is possible. Home prices fell in the winter—what Mr. Fleming calls the “offseason”—in each of the last three years to record a new low. But they have not fallen by 9.6% in any six-month span since March 2009, which was when the U.S. economy was still in recession.

That’s the good news. Here’s the bad news: While the year-over-year comparisons look good right now, the economy—and workers’ wages—aren’t growing fast enough to justify this kind of increase on a sustained basis.

Instead, the snapback in home prices in the last six months is more an indication of how prices “over-shot” over the past year. Investors, sensing deals, began buying up homes. The most likely scenario for home prices over the next year is that they may rise, but not at the breakneck pace of the past few months (and they’ll fall on a relative basis in the coming months due to normal seasonal factors).

There are other serious headwinds. It’s still hard to get a mortgage, and many households have too much debt. Millions of homeowners owe more than their homes are worth. Millions more have enough equity to sell their house but not enough to make a down payment on their next house and pay a real-estate broker’s commission.

As we’ve written many times before, the strong rise in home prices this year owes as much to sharp declines in inventory as it does to demand-side improvement. Banks have been much slower to take back and list foreclosed properties, easing pressure on home prices but leaving a bloated “shadow inventory” of potential foreclosures.

These homes will weigh on markets for years, though there’s less evidence that they will be dumped on the market at once. While the shadow inventory may not lead to a big drop in prices that some have feared, it will probably keep a lid on future home-price gains.

Finally, lower mortgage rates have dramatically increased the purchasing power of today’s home buyers when compared to one year ago. Some real-estate executives are nervous that demand isn’t stronger given today’s low mortgage rates, and they’re worried about what will happen if rates rise.

The bottom line: Don’t be surprised if the all-time low in home prices is in the rearview mirror. But this doesn’t mean a full-on recovery is here, and there’s little evidence that the current pace of improvement can continue. For now, home prices appear to be bumping along a bottom.


The Iron Eagle Realty Team's mission is to assist you, our client, in the sale and acquisition of real estate properties in the state of Idaho, specifically the Boise Idaho Real Estate Market. Whether you are buying or selling a home, whether it is a foreclosure, short sale or equity property, we handle our customers and clients with empathy and honest truths so they can make informed decisions as they advance in the process of buying and selling real estate that meet specific needs.

PS: We've Helped More Buyers and Sellers than 99.8% of any Local Realtor
Click Here to Search 24/7 for The Best Real Estate Deals in Boise!Click Here to Download Our Free "Selling Your Home" Pre-Listing Plan! Click Here to Pre-Qualify for a Loan Online!

Regards, Michael Hon, REALTOR®CEO, The Iron Eagle Realty Team
Associate Broker, Silvercreek Realty Group
Certified Short Sale Specialist®
Investment Property Consultant
Direct: 208.919.0458 Office: 208.939.9033 Fax: 208.514.1422
www.IronEagleRE.com Michael.Hon@IronEagleRE.com

Mortgage rates going up, up, up

Mortgage rates going up, up, up
Fed may take action as soon as next week
BY INMAN NEWS, THURSDAY, AUGUST 23, 2012.


Mortgage rates ticked up from historic lows for the fourth week in a row as the bonds that finance most home loans continue to look overpriced to investors.

Some have speculated that the prospect of rising mortgage rates could spur homebuyers who have been sitting on the fence into action. But for now, mortgage rates are still well below historic norms, and there's speculation that the Federal Reserve could move as early as next week to keep long-term rates in check.

For 30-year fixed-rate mortgages, rates averaged 3.66 percent with an average 0.7 point for the week ending Aug. 23, Freddie Mac said in releasing the results of its latest Primary Mortgage Market Survey. That's up from 3.62 percent last week, but well below the 4.22 percent offered at the same time a year ago. Rates on 30-year fixed-rate mortgages hit an all-time low in Freddie Mac records dating to 1971 of 3.49 percent during the week ending July 26.

For 15-year fixed-rate mortgages -- a popular option for homeowners refinancing a loan -- rates averaged 2.89 percent with an average 0.7 point, up from 2.88 percent last week but down from 3.44 percent a year ago. Rates on 15-year fixed-rate mortgages hit a low in records dating to 1991 of 2.8 percent during the week ending July 26.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.8 percent with an average 0.6 point, up from 2.76 percent last week but down from 3.07 percent a year ago. Rates on five-year ARM loans hit a low in records dating to 2005 of 2.74 percent during the week ending July 26.

For one-year Treasury-indexed ARMs, rates averaged 2.66 percent with an average 0.4 point, down from 2.69 percent last week and 2.93 percent a year ago. Rates on one-year ARMs hit an all-time low in records dating to 1984 of 2.65 percent during the week ending Aug. 9.


A separate survey by the Mortgage Bankers Association showed demand for purchase loans during the week ending Aug. 17 was up a seasonally adjusted 0.9 percent from the week before, and up 3 percent from a year ago.

Applications for refinancings -- which accounted for eight out of 10 loan applications -- were down 9 percent from week to week, to the lowest level since early July, the MBA said.

With mortgage rates at all-time lows in July, sales were up 9.4 percent from a year ago and home prices posted their strongest annual growth since 2006, the National Assocociation of Realtors reported this week. Now, some are wondering if mortgage rates are headed up, what impact that might have on sales.

In the short run, rising mortgage rates could boost home sales by getting buyers off the fence, NAR Chief Economist Lawrence Yun said in March, when mortgage rates also appeared to be on their way up. But a significant increase in mortgage rates will reduce homebuyers' purchasing power and shrink the pool of eligible homebuyers, Yun fretted.

At the time, Yun expected rates on 30-year fixed-rate mortgages were headed to 4.5 percent, which he said would dent home sales by 3 percent. If rates on 30-year loans hit 5 percent, the impact on home sales would be closer to 6 percent, Yun said in March.

The Federal Reserve has made it a priority to keep mortgage rates and other long-term interest rates low during the downturn to encourage borrowing and stimulate the economy.

In a program that wound down in 2010, the Fed bought $1.25 trillion in mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac. The artificial demand for MBS created by the Fed pushed MBS prices up, and yields down (bond prices and yields move in opposite directions).

When the Fed ended the program in March, 2010, the Mortgage Bankers Association predicted that rates on 30-year fixed-rate mortgages would rise from around 5 percent at the time, to 6.6 percent by the fourth quarter of 2012.

But the European debt crisis and continuing uncertainty about the global economic recovery created demand for Treasurys, government-backed MBS and other investments seen as safe havens by investors. That pushed long-term yields -- including mortgage rates -- down even more.

In a forecast issued this week, economists at Fannie Mae said they expect rates on 30-year fixed-rate mortgages will average 3.7 percent next year, and that existing home sales will grow more modestly in 2013 (2.8 percent) than this year's projected growth of 7.8 percent.

The Fed has continued measures designed to keep a lid on interest rates -- last fall it announced it would reinvest principal payments on its holdings of Fannie Mae and Freddie Mac debt and MBS, which totaled $1 trillion at the time, into agency-backed MBS as those investments matured.

Now, there's speculation that the Fed will embark on a third round of "quantitative easing," or QE3, to keep an economic recovery on track.

Minutes of the Federal Open Market Committee's last meeting showed its members in general agreement that "additional monetary accommodation would likely be warranted fairly soon" absent considerable improvement in economic indicators.

The minutes show that committee members discussed the merits of purchases of Treasurys versus agency MBS. While some worried that more large asset purchases could actually "increase the risks to financial stability or lead to a rise in longer-term inflation expectations," others "agreed with the staff's analysis showing substantial capacity for additional purchases without disrupting market functioning."

Many at the meeting said any new purchase program "should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the committee's assessment of the efficacy and costs of the program," meeting minutes said.

The Federal Reserve could act at as early as next week's Jackson Hole symposium, where Fed Chairman Ben Bernanke announced QE2 in 2010, Reuters reports.

Mortgage broker and Inman News columnist Lou Barnes sees no fundamental economic explanation to the recent rise in rates. While some analysts think investors are less enthusiastic about buying Treasurys and mortgage-backed securities because the economy is improving and the Fed won't embark on QE3, Barnes thinks there's a more technical explanation.

With yields at record lows, bond and MBS prices are also at record highs. Investors are simply taking profits, pushing bond and MBS prices down and yields up, Barnes says. He thinks the sell-off in 10-year Treasurys could push yields back up to 2 percent, which would put 30-year fixed-rate mortgages back in the 4 percent to 4.25 percent range.

The increase in rates "might stop here, but rates are not going all the way back down until something ugly happens," Barnes said in his most recent Inman News column.





The Iron Eagle Realty Team's mission is to assist you, our client, in the sale and acquisition of real estate properties in the state of Idaho, specifically the Boise Idaho Real Estate Market. Whether you are buying or selling a home, whether it is a foreclosure, short sale or equity property, we handle our customers and clients with empathy and honest truths so they can make informed decisions as they advance in the process of buying and selling real estate that meet specific needs.

PS: We've Helped More Buyers and Sellers than 99.8% of any Local Realtor
Click Here to Search 24/7 for The Best Real Estate Deals in Boise!Click Here to Download Our Free "Selling Your Home" Pre-Listing Plan! Click Here to Pre-Qualify for a Loan Online!

Regards, Michael Hon, REALTOR®CEO, The Iron Eagle Realty Team
Associate Broker, Silvercreek Realty Group
Certified Short Sale Specialist®
Investment Property Consultant
Direct: 208.919.0458 Office: 208.939.9033 Fax: 208.514.1422
www.IronEagleRE.com Michael.Hon@IronEagleRE.com