Monday, August 13, 2012

Is a short-term mortgage right for you?

  • Own your home outright faster. You'll be free of mortgage payments sooner, too. You still must pay taxes and insurance, though.
  • Save on interest. The savings are potentially massive. A certified financial planner in Southfield, Mich., says that she and her husband will save a whopping $128,190 in interest if they keep the new mortgage with its 3.375% interest rate for the entire 15 years.
  • Equity builds faster. It was noticeable right off the bat, especially to individuals who see equity piling up quicker on their monthly mortgage statements. Even if some sell their home before the new mortgage is paid, they'll pocket more cash from the sale than they would have with the old mortgage.
For example, if the you had borrowed $200,000 over 30 years at 5.25% and sold your home in the 10th year of the loan, you would have accumulated $38,424 in equity from your payments. But by borrowing the same amount over 15 years at their new rate of 3.375%, you'll have roughly $129,000 in equity after 10 years.

  • You may not qualify. You'll need a strong mortgage application to satisfy lenders, and your home's appraisal must be high enough to support your loan request. That could be a problem if you have low or negative equity.
  • Your payment may grow. Depending on the fees, the size and term of your loan, and the difference between your old and new interest rates, your new monthly payment is likely to be higher, maybe much higher. Or it could remain the same. The Joys' payment grew from $900 a month to $1,250.
  • It's expensive. Fees of $5,000 or more could wipe out any benefit to refinancing. These charges may include an appraisal fee, inspection fee, private mortgage insurance, prepaid interest, application fee, loan origination fee, homeowners insurance, and points and fees imposed by the Federal Housing Administration or other government lending programs. The Federal Reserve's Consumer Guide to Mortgage Settlement Costs explains mortgage fees and estimates costs.
  • The paperwork is a headache. Lenders may demand a lot of documents, from tax statements to old divorce papers. It can seem invasive.
  • It takes months. Lenders are so busy now, and their lending requirements are so strict, that it can take months to get a loan approved. TD Bank, for example, averages 51 days to process a refinance from the time the application is submitted, according to TD Bank. That's relatively quick. Some banks can take as long as 120 days. When choosing a lender, ask several about their turnaround times.

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