In 1971, The Who first sang, “Meet the new boss, Same as the old boss,” which came to mind as I started to read about Worth Unlimited, a mortgage acceleration program. Only it’s not a new program, it’s the Money Merge Account program only with a new name.

When MMA first came to my attention, I wrote numerous articles looking at it from every angle and debunked this as a fraud. A compilation of all the posts including guest posts and supporting data is available as a PDF. It offers an unreeditted overview of my analysis of the software and the claims of the agents who sell it. I didn’t edit out where I state early on that I didn’t think it a scam just a system that didn’t work, but later on, my opinion changes as I saw more agents making outrageous claim that were fraudulent. The song I quoted from? “We won’t get fooled again.” And that should be your response if anyone tries to introduce you to this product.

written by Joe \\ tags: money merge account, Mortgage, worth-unlimited

I’ve been hearing more confusion lately regarding how and when it makes sense to refinance your mortgage, and thought we’d discuss it a bit today. First, the obligatory graph -

You can see that as recently as 2009, rates were still above 5% and in the 7′s earlier in the decade. This is well above today’s 30 year rate of 3.4% or 15 year rate of 2.7%. Still, there are people who are under the misconception that a refinance on a 30 year mortgage makes no sense if you are half way through it. Nonsense. (Because on a family friendly site, I’m not supposed to say Bull****) It might be silly to refinance when there’s only a year left to go, but you should do the math and see what makes sense for you.

The way a mortgage is paid off, with a 5% rate, a 30 year mortgage will have about half its balance after 20 years. So, with $100,000 left on that $200,000 mortgage, you find a 15 year rate of 3%, higher than I mention above, but with no closing costs. You see that you were paying $1073 per month, and the new payment will be $690. What to do? Here’s the key point – go back and calculate the payment should you choose to use the new rate but pay it off in the 10 years that remain. You see $965. By refinancing and making payments to stay with the remaining term, you still save nearly $110 per month. Each and every month for 10 years. Not bad for a few hours effort to gather up the paperwork.

Should you take the new payment offered? If you have a car loan or other high interest debt, the extra $380 might help you save quite a bit in interest. Are you depositing enough to your 401(k) to get the full match your company offers? You might deposit that $385, pre-tax and have it doubled on deposit. When 10 years pass, the extra money in the 401(k) will far exceed the remaining mortgage balance. The important factor to consider when comparing loans is how the payments compare when using the same term that remains on the old mortgage. It’s easy to drop your payment by extending the loan to 30 years every time you refinance, but that’s a losing game, at some point you want to put the loan behind you. Tonight I answered a question Are there downsides in refinancing with 5 and 1/2 yrs left? I agreed with the fellow asking the question, it’s a good deal, he’ll save nearly $4000 over the remaining 5 years of his mortgage by refinancing.

written by Joe \\ tags: loan, Mortgage, refinance

In the day to day conversations about money there are probably a good dozen recurring themes that are brought up frequently. One of them is refinancing the mortgage, and with rates as low as they are today, the debate of 15 vs 30 year terms is still being tossed around. There are compelling arguments for both sides, after all, wouldn’t it be cool, at say, 25 years of age, to know you’ll live in a fully paid for house by age 40? But wait, wouldn’t it be cooler still to have money owed out at 4% or less but see it grow at 10% per year or more, and 15 years into the mortgage have an investment account worth three times the remaining balance? Good luck, the ’00s would have scared you straight. (Am I the only one that recalls the documentary Scared Straight?)

Back, even in the 90′s the choice was a bit simpler. Mortgage rates were higher and the ratio of the payment for 15 years term was lower. ?? I lost you? Ok, let me walk you through this:

I calculated the payments on a $200,000 loan, with rates over 7%, and the rates you’ll see today. You can see that it would have taken a 29% higher payment to bring the 7.5% mortgage down to 15 years and the lower 7% rate. Of course today, we get to start at 4% for a 30 year fixed, but as you can see, the payment is a full 50% higher to pull the term into 15 years. Sound strange? It did to me until I realized that if we took this to an extreme, a loan at zero percent, it would take twice the payment to pay the loan off in half the time. When rates were truly insane (18 percent mortgage anyone?) it would take less than 5% higher payments to knock 15 years off that mortgage.

Note – the 15 year term typically comes with a slightly lower rate, about 1/2%, this isn’t fixed, you need to see what rates your bank offers for each term.

There are some good things to consider before going for the 15:

• Are you depositing to the match in your 401(k)?
• Is all higher interest debt paid off?
• Are you planning to expand the family?
• Might you or your spouse change jobs or reduce hours?
• Is your emergency fund sufficiently funded?
• Have you and your spouse sat down to create a budget that accounts for 100% of your known expenses?
• Do you have plans for your roof, furnace, air conditioner, hot water heater, and all appliances to be replaced?

You see where all this is going. If you were looking at having your mortgage payment be a reasonable 20% of your income, going for the 15 year term pushes you to commit to 30%. Considering the chunk that goes to taxes, retirement savings, food, etc, it’s this 10% push that may leave you in a bind.

Note, my view of this shifts as one gathers assets over the years, or pays the mortgage down to where the 15 year is a small portion of their income. Our current mortgage is half of what it was when we bought the house, and the rate is also half, so the payment for our mortgage after the last refinance accounts for less than 10% of our monthly income even though it’s a 15 year term.

What do you think? Is a 15 year mortgage risky for you because it ties up too much monthly cash?

written by Joe \\ tags: budget, Debt, Mortgage, refinance, Savings

As I mentioned sometime ago, in my article Mortgage 101, the typical limit for a well written new mortgage is 80% of the house’s appraised value, or 80% LTV (loan to value.)

But, what if you come up short, and instead of having a full 20% down, you only have 15%. This is when PMI comes into play. PMI, the initials for private mortgage insurance is the fee you’ll pay each month until your loan is down to the 80% of the initial home value. What I want to look at today is the cost of PMI, with a focus on those loans that are at that 15% down range I suggested.

The FHA has recently announced the PMI rates effective June, 2012. The rate is 1.2% for a loan up to $625,000.

Let’s work out the math here. You wish to buy a home that’s at the median $140K or so. You put down 15% or $21K, and the loan value is $119K. The dollar amount you are short from being at the full 20% down is just $7000, but you will pay 1.2% per year on the $119K mortgage, or $1428 per year until the balance is paid down to $112K. On a 4%, 30 year loan, this will take about 3 years, not too bad, but look at the numbers, an annual cost of $1428 because you needed an extra $7000. Let me do the math for you, this is 20.4%. In addition to the interest on the mortgage.

On the other hand, if you only put 5% down, the PMI rate rises to 1.25%. On that same $140K house, your loan is $133K, and your PMI, $1662.50 per year. But, when you consider that you’re paying $1662.50 for the fact that you are short $21,000, it’s more like a 7.9% adder for that missing $21K. Not a great deal, but a far cry from 20%+.

What do I conclude from these numbers? First, I maintain that 20% down is the right thing to do, but if you are close to having the 20%, avoid the 85% LTV, and raise that extra cash however you can. If a small 401(k) loan can help you avoid PMI, do it. If you need to borrow from friends or family, put a plan together, offer them a decent rate, and take that side loan.

Have you ever taken a mortgage that came with the need for PMI? Did you understand how much it was going to cost you?

written by Joe \\ tags: Mortgage, PMI

I have a rental property that had a mortgage with a dozen years left to go. The remaining balance, $72,000 and a rate of 5-7/8%. I recently got a letter from Chase telling me they’d offer a refinance with little effort on my end, no appraisal, no income check. It would cost $1800 in fees, however. The new rate, for a 10 year loan would be 4-3/8. So, a back of napkin calculation tells me I’d save just over $1050 in interest the first year, and would break even by the second year. By pulling the remaining time down to 10 years, combined with the bank adding the $1800 fee to the mortgage,  I wind up with a slightly higher payment, $62/mo higher. But in the end, it’ll be worth getting rid of this mortgage two years sooner and seeing the rent check as an income. That’s what I did yesterday afternoon, talk to Chase for a half-hour or so, and scan/email some forms back and forth.

written by Joe \\ tags: Debt, Mortgage, refinance