Mortgage Refinancing Loan Terms – Are 10 or 15 Year Terms Better?

10 Year Vs. 15 Year MortgagesThere is a lot of decision making involved in refinancing a mortgage loan. Before applying for a mortgage, you should figure out what your budget is, so you will know how much you can spend on fees, down payment, and the mortgage itself. Also, it is very important to come to a conclusion regarding what your future plans are, like how long you want to live in the home that you are buying. All these factors will help you better determine what kind of term you are looking for in a mortgage.

Why You Should Opt for Shorter Terms

Paying off a mortgage in 30 years is very common, and will probably work for you as well. Even if your interest rate will be slightly higher, your monthly mortgage payments will be lower, so you will have an easier time paying it off. That sounds great, but taking pretty much half your life to pay off a mortgage sounds a bit daunting. A good alternative is to get a 15, or even 10, year mortgage loan, which will have a lower interest rate but larger monthly payment. However, even though comparing a 15-year mortgage to a 10-year mortgage seems much easier than comparing a 15 and a 30-year, there are some things that you need to keep in mind before deciding on either one (Read: Home Refinancing Objectives: The Basics).

Differences between a 10-Year and a 15-Year Mortgage

Usually, paying off a mortgage loan in less years means that you will pay less in interest. The difference in interest may seem very small, less than 1 percent, for example, but that means thousands of dollars over time (even tens of thousands of dollars) depending on how large your mortgage loan is. The difference in interest between a 15-year mortgage and a 10-year mortgage will probably be even less than .50 percent, but it will still be a huge difference in the interest that you will be paying during the loan repayment period.

The downside is that, the shorter the loan term, the larger your monthly mortgage payments will be. Depending on your budget and plans, this might only be a small disadvantage. If you can afford the monthly payments and plan on paying off your mortgage as soon as possible, getting a mortgage with a lower term is the way to go.

If you are unable to make a larger mortgage payment each month, paying off your loan in 15 years instead of 10 is a good alternative. Your monthly payments will be lower, but your interest rate will be higher, so you will spend more overall than if you paid off your mortgage in 10 years. However, you have the option of making additional principal payments which will result in paying off the debt in the same amount of time as a 10-year mortgage, and also give you the option of skipping a principal payment if money is tight in any particular month.

The amount of years that you need to pay off a mortgage loan can make a large difference in how much you spend on your mortgage. Longer terms mean that you pay more overall, but you can do it much easier, shorter terms mean that you pay less overall, but at the cost of having to come up with more money each month. Ultimately, deciding between refinancing into a 10-year or a 15-year mortgage depends on how much you are willing to spend on your mortgage each month and your future plans.

Simple Interest Mortgages vs. Traditional Interest Mortgages

Simple Interest Mortgages vs. Traditional Interest Mortgages-150x150When they buy a home, most home buyers take out a traditional mortgage to pay for their purchase. Traditional mortgages are recommended for most borrowers, but you should be aware that there is another, very similar, type of mortgage that may be to your advantage. The simple interest mortgage uses a different method of calculating interest due on your mortgage loan. If this type of mortgage is used correctly, it can help you pay off your mortgage faster.

How is the Interest Calculated?

The interest on a traditional mortgage is calculated monthly. The annual interest rate is divided by 12 and the monthly rate is used to determine the interest on each monthly payment. For example, on a 30 year fixed-rate mortgage with an interest rate of 3.6 percent, the 3.6 is divided by 12. The resulting 0.3 percent is multiplied by the loan balance in order to find out the interest that has to be paid.

The interest on a simple interest mortgage is calculated daily, by dividing the annual interest rate by 365, then multiplying the result with the loan balance. If we use this formula for the example above, the interest on a 30 year fixed-rate mortgage with a 3.6 percent interest rate would be calculated by dividing 3.6 by 365. The result, 0.00986, will be then multiplied by the loan balance in order to calculate the daily interest that must be paid. These daily charges will be then added up every month in order to determine your monthly interest payment.

Which One is Better?

The answer to that question is yes and no, depending on how you plan on using the mortgage. If you make your monthly mortgage payment on its due date each month, without being late or missing a payment, then both simple interest and traditional interest mortgages will cost almost the same. However, if you are late with your monthly payment, the difference between the costs of the two types of mortgages will become much larger.

When making payments on your mortgage, you are typically allowed a “grace period” of 10-15 days after the due date, in which you can still make the payment with no repercussions. Traditional interest mortgages calculate the interest once per month, so you can take full advantage of this grace period. However, being late on a monthly payment when you have a simple interest mortgage means that you will be paying a slightly higher interest for the days that you were late, because the interest is calculated daily. This interest can accumulate over the life of the loan costing you several thousands of dollars.

You can turn having a simple interest mortgage to your advantage by making your monthly mortgage payments before the due date each month. This strategy will result in interest savings, which can also accumulate over the life of a loan, making a simple interest mortgage cheaper than a traditional one.

There is no simple answer when comparing simple interest mortgages to traditional interest mortgages. The best thing to do is research both of them, figure out what your possibilities and future plans are, and find out which one of these two types of mortgages would suit you better.

Mortgage Myths Finally Explained

Mortgage Myths Finally Explained-150x150Before buying a home, most people go through the same process, which mostly involves researching for lots of information. While going through mortgage loan options, pros and cons of each type of loan, and using mortgage calculators, you may come across on some information that has very little truth to it. Mortgage myths are very common, especially online, where anyone can post information about buying a home. While some of these myths are harmless and you will probably find out the truth before buying a home, there are others which can potentially cause some serious damage, and interfere with your ability to buy a home. In this article, we will explain some of the most common and dangerous myths, to ensure that you make the best decisions when shopping for a mortgage loan.

Top 5 Mortgage Myths

  1. The best mortgage is the one with the lowest interest. Looking only at the interest rate when comparing mortgage loans is a huge, but common, mistake. Several other important factors should be researched before deciding on a mortgage loan. Things like the overall cost of the loan, the down payment required and the closing fees are also important, if not even more important than the interest rate. There are also the adjustable-rate mortgages which offer a low interest rate in the beginning, but which can increase significantly over the repayment period.
  2. Pre-approved for a mortgage loan is like already being approved. The mortgage loan pre-approval process is designed to take a simple look at your financial situation, and give you an idea about how much you can borrow. Once you find a suitable home, you will have to provide more important information about your finances, such as employment information, to your lender. Sometimes, this additional information can affect the amount of money that your lender will let you borrow, or even cause your lender to refuse giving you a mortgage loan.
  3. 30-year mortgages are your best choice. 30-year mortgage loans are, indeed, very popular, and probably the most common choice among home buyers, but that doesn’t mean that this type of loan is the best for you. Depending on your situation, a 15-year loan, for example, might be a better choice, even if the payment will be higher. Paying off a loan in half the time, means that you will save significantly on interest, which will make the overall cost of the loan lower, and save you money.
  4. Fixed-rate mortgages are your best choice. Fixed-rate mortgages may be more popular, but you should decide on which loan you want to go with, based on your situation. For example, many home buyers don’t live in the home that they bought for very long, which makes adjustable-rate mortgages a better option for them. Adjustable-rate mortgages start out with a fixed interest rate, which lasts for a predetermined period, and it’s generally lower than the interest rate on a fixed-rate mortgage loan. By getting a mortgage loan with an adjustable-rate, you will be saving money over a loan with a fixed-rate, if you don’t plan on living in the home for a long while.
  5. You won’t be granted a mortgage loan if your credit score is low. Credit score has a large influence on whether you receive a mortgage loan or not, the loan type, loan amount, interest rate, and the down payment. But having bad credit doesn’t necessarily mean that you will be refused when you apply for a mortgage loan. You lender will see you as a high default risk, and your loan will probably not have the best terms, such as the interest rate, and the required down payment, but your lender will be willing to help you buy a home. After all, they have only to gain if they bring in a new customer.

You’ll be encountering mortgage myths at every step when researching mortgages and the home buying process. It is up to you to tell apart myth from reality. Knowing the dissimilarity between these two can make the difference between getting a mortgage loan that you are comfortable with, or one that will cause you nothing but issues down the line. Getting the best deal is your main goal when shopping for a mortgage, so being prepared will help you avoid falling into some expensive traps, and even ruin the chances of becoming a home buyer.

Current Mortgage Rates: 30 Year Fixed Vs. 20 Year Fixed

Current Mortgage Rates-30 Year Fixed Vs. 20 Year Fixed-150x150The time required to pay off a loan has the biggest influence on the amount of your monthly payment. The lower the loan term, the more you will save in interest compared to longer term loans, but your monthly payments will also be larger. With so many loan term options to choose from, there are a lot of factors to look at when making a decision as to what loan term is best for you, your budget, and your financial situation. Read on to see if  a 30- year or 20-year loan is the best choice for you!

The Difference in Interest Rates

At first glance, there isn’t much difference between the interest rate on a 30-year loan and a 20-year loan. Currently, the difference between the two types of loans is only around .13 percent, which may not seem like a lot, but this small percentage can mean thousands of dollars over the life of the loan.

These rates fluctuate based on several factors, but they usually follow the same pattern. The difference in interest on a longer term loan doesn’t look that significant, but the lenders will collect more revenue over time on a long term loan than they would on a short term loan.

However, the monthly mortgage payment will be larger on a 20-year fixed-rate mortgage loan than it would be on a 30-year fixed-rate loan. Whichever you choose to go with depends entirely on your budget and future plans, but you should keep in mind that you will always save money by choosing the shorter term loan. The 20-year fixed-rate mortgage is a good compromise for someone whose budget doesn’t allow him or her to make the monthly mortgage payment on a 15-year mortgage, but wants to pay off their loan in a shorter time than 30 years, while saving some money in interest.

Other Differences Between 20-Year and 30-Year Mortgages

The interest rate is not the only aspect that you should consider when choosing between a 20-year fixed-rate loan and a 30-year fixed-rate loan. Another important part of taking out a loan is how much you will be paying in points. Points are fees charged by lenders to cover costs like inspection fees and preparation fees. The points will usually be a percentage of your total loan amount and will be based on the mortgage term. With points charged on a 30-year mortgage being a little over 1 percent, you will again save money be choosing a shorter term mortgage, for which the points will be under 1 percent.

Another thing that you should take into consideration when choosing between the two types of loans is how fast equity is built with each loan. Shorter term loans, like the 20-year, allow you to build equity much faster than you would on a 30-year mortgage loan. Higher equity will make it possible for you to secure a second mortgage loan much easily.

At the end of the day, choosing between a 20-year and a 30-year mortgage loan will depend on whether you can afford the higher payments of a shorter term loan. Saving money is always a top priority for everyone, so you should choose the mortgage loan that is less expensive, but only after a careful analysis of your options and budget. The mortgage rates difference might not seem very significant when shopping for a loan, but it will make a big difference in how much money you pay over time.

Do You Recognize the Early Warning Signs for Increasing Home Interest Rates?

Do You Recognize the Early Warning Signs of Increasing Home Interest Rates- 150x150Home interest rates are near historic lows at the moment, but have started to slowly increase since last year when they were at an all-time low.  For the past few months, interest rates have been steadily rising and, while a huge increase is very unlikely, so are further decreases.

Mortgage rates today for a 30-year fixed-rate mortgage are around the 3.5 percent mark, an increase over the November 2012 rate of 3.31 percent. Rates for a 10-year fixed-rate mortgage are hovering around 2.60 percent, staying near the historic lows reached last year.

Rates are expected to go over 3.75 percent by the end of 2013, and maybe even reach 4 percent. This increase will affect homeowners who wish to refinance more than they will affect people who are looking to buy a home. This rise in mortgage interest rates will make buying a home more expensive, but it isn’t expected to slow down the housing market recovery.

Factors Contributing to Increasing Home Interest Rates

During the past few years, the Federal Reserve has purchased bonds for hundreds of millions of dollars, which keeps the mortgage interest rates low, in order to attract more consumers and investors. The result was an increase in refinances, but it hasn’t generated as many home purchases as it was expected.

The main factor that will contribute to increasing home interest rates is the economic growth. Along with economic growth, there will be a decrease in unemployment rates, an increase in new construction and home prices, which will stimulate the housing market to grow, and mortgage interest rates will rise.

At the end of last year, a 7.8 percent unemployment rate was recorded, the lowest since 2009. As more and more people get jobs, many of them will want or need to relocate, so the real estate market will see more buying activity.

Builders are also recovering from the economic recession and are starting to build more new homes, as the demand increases monthly. It is expected that new homes construction for single families will see a 20 percent increase compared to 2012, and multi-family homes a 15 percent increase over last year.

The steady increase in home prices helps the economic growth, therefore being a contributing factor to the rise in mortgage interest rates. Statistics show that home prices have seen a 10 percent increase between 2011 and 2012. Mortgage loan requirements are still pretty strict, but it is still expected that there will be more home sales in 2013 than there were in 2012.

The economy is expected to only grow by 2 percent this year, so the mortgage interest rates increase won’t be so extreme. The economic growth should be a warning sign for all those who wish to buy a home while taking advantage of the near record low interest rates. Unless an unforeseen event that will affect the economy occurs, such as a new economic collapse or war, the economy will continue to grow and even pick up the pace, so looking at the warning signs and being ready to buy will help you save a significant amount of money.

Should You Take Advantage of a Portable Mortgage?

Should You Take Advantage of a Portable Mortgage- 150x150Portable mortgages allow you to move your mortgage from one property to another. When moving and taking out a new loan, instead of repaying your initial mortgage, you transfer it to the new home. This type of mortgage first appeared in 2003 and was introduced by E*TRADE Mortgage. The portable mortgage was only offered on 30-year mortgages with a fixed interest rate. It featured a higher interest rate than a regular mortgage, and it could only be used to purchase single-family homes. The home purchased with a portable mortgage was required to be the borrower’s permanent residence. The borrower was also required to have a clean credit report, and provide all of the necessary documentation.

Advantages of a Portable Mortgage

Like all mortgages, a portable mortgage can be the perfect fit for you, depending on several factors. For example, if you move frequently or have a job that requires you to change locations every few years, the portable mortgage might be a great choice. There are two main advantages of a portable mortgage:

  • Avoid the cost of taking out a new mortgage loan. Usually, when you take out a new mortgage loan, closing costs and other fees can be in the thousands of dollars, making the overall cost of the loan much higher than you initially thought it would be. You will still have to pay some fees, but you will save significant money in closing costs compared to taking out a new loan without having the portable mortgage option. You will also avoid paying any pre-payment penalties on your initial loan.
  • Avoid an increase in interest rate. If you have qualified for a good mortgage interest rate on your original loan, then you can carry the same interest rate to your new loan. If your credit was good when you took out the first mortgage, but has decreased since then, you will still be able to qualify for the same interest rates, unlike with a regular mortgage loan where the interest rate that your lender will give you will be strongly influenced by your current credit score. This can be a great advantage, especially if you are moving frequently.

Disadvantages of a Portable Mortgage

Portable mortgages do feature some disadvantages, as well, but it all comes down to whether you really need this type of mortgage. As with the advantages, how much you move has an influence on how well this mortgage suits you. If you don’t move too often, then this might not be such a great choice for you when it comes to choosing a mortgage loan type. The two main disadvantages of a portable mortgage are:

  • Higher interest rates. A portable mortgage is a good choice for some individuals, and they will save money even if the interest rates are higher. If you are not in the situation of needing a portable mortgage, and come to the conclusion that you will end up paying more, then it is better to keep searching for a conventional loan that might better suit you.
  • Good credit required. Unlike regular mortgage loans, where you can also qualify with not so stellar credit, in order to get approved for a portable mortgage, you will need a perfect credit score.

Deciding whether a portable mortgage is right for you or not depends mainly on how long you plan to keep your first home before moving into a new one. So the best thing to do is do your homework, learn what is involved with portable mortgage, know its advantages and disadvantages, but more importantly, have clear knowledge of your financial situation and future plans.