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What Your Mortgage Lender Is Not Telling You About Accelerated Mortgages
For years, mainstream banks and financial advisors have been recommending that you pay extra cash into your mortgage account in order to cut down the huge interest amount and reduce the period over which you pay back the loan.
For example, if you borrow $200,000 over 30 years at a rate of 5%, your monthly repayments would be around $1074. Over 30 years, you would actually pay $1074 x 360 (months), which is $386,640. Thats a of $186,640 in interest!
Now if you could find an extra $246 a month, and pay $1320 a month into your mortgage account, you would cut 10 years off the repayment period - the loan would be fully paid in only 20 years instead of 30 years. Moreover, your total payments would be $316,664 -saving you $69,756! Looks like BIG savings for you right? Not so fast though...keep reading.
You see, the flaw in this technique is that it ignores the time value of money.
The banks, mortgage lenders and other financial types know that money is worth less now than it was when they were younger. Take that $1074 mortgage repayment for instance, in 30 years time, when the last payment is due, it would only be worth $437 in todays money (based on current inflation growth).
A dollar now is always better than a dollar in a years time or in 10 years from now.
How does the time value of money affect our example?
You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. What you need to do is calculate the Present Value of each mortgage.
The Present Value of a 30 year mortgage with repayments of $1074 at a 5% interest rate is $200,066.
The Present Value of a 20 year mortgage with repayments of $1320 at a 5% interest rate is $200,066.
Thus, the two repayment plans are exactly equal over time.
Much of this $69,756 saving on the interest rate is really no more than the result of you paying the extra $246 a month. That $246 a month for 20 years totals $59,040.
What if you took that $246 a month and invested it in, for example, mutual funds?
If you could get a return of 10% each year, after 20 years you would have $186,804. With inflation at 3%, that would be worth $102,597 in todays money.
So why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better right? - wrong.
Banks love being able to prove that their recommendations will save you money. But in reality, and as I stated earlier, the banks have a very good understanding of the time value of money. They know the true value of that extra $246 a month that youre giving them now, and not in the future. And the shorter the time you take to repay the mortgage, the lower their risk, and the sooner their money comes back to them to be loaned out again.
There are some arguments for paying your mortgage back quickly - for one thing, the quicker you pay, the quicker your equity grows. But you should understand that every dollar you give the bank now is a dollar that you cant invest.
Giving your money to the bank to avoid paying 5% interest means that you cant use that money to earn 10% or 12% or 15% interest somewhere else.
If youre currently following an accelerated payment plan, you may want to have a family and/or financial advisor pow-wow. This meeting should focus on whether or not those extra mortgage dollars can be invested to earn a more positive cash-flow for you instead of your bank.
Composite Credit Report Score Simplifies Mortgage Issues
Do you want a mortgage loan for your new home? Trying to qualify for a new mortgage can be very tough, especially if you aren?t aware of the effect your credit report score has on your ability to get approved for loans. One of the first things a lender looks at to determine your suitability for a mortgage loan is your credit report, or FICO score.
This is a composite score that gives a quick glance at your overall responsibility rating when it comes to finances. It has to do with how well you maintain repayment plans, how well you keep the ratios of your overall debt to income, your stability in employment, and many other things. Basically, the better your credit report score, the more likely you are to qualify for the loan you want.
Of course, there are many things that a lender considers before reaching the decision about your suitability for a mortgage loan. Employment stability is one. Lenders know that people who stay in the same field of work will more likely stay employed, and therefore will be more likely to repay their obligations. So, even if you have changed jobs recently, if you have kept a progression of advancing within the same field, or have simply changed employers but kept the same basic job with each, your ability to be approved for a mortgage loan should not be hindered much, unless there are negative reasons for your changing jobs.
As a matter of fact, now that automated credit report scoring has come into the lending business, less discretion gets used in determining who qualifies for what credit rate. This is supposed to ensure more objectivity in the loan approval process. For this purpose, the automated credit report score is used to give lenders the ability to boil the entire process down to review of only your overall score.
Unfortunately, this can close out some borrowers from getting loans of the amount, or interest rate they would like. Its even possible that a prospective borrower with enough income could actually be denied a loan he could afford due to a low standardized credit report score. For this reason, its imperative that prospective borrowers be diligent about improving their credit report scores and paying their bills on time. In this way the problem of disputing a low credit report score is alleviated.
Since there are five key factors that go into the composite credit report score, knowing what they are can help consumers to take control of their financial destiny by making them able enough to change things in their favor.
The very first thing that affects your overall credit report score is how well you repay your debts. Even a person with low income who carefully ensures that all his debts are repaid on time will be able to maintain a high credit report score. And timing is everything. A recent late payment is worse than several late payments some years ago.
Next, collection accounts and public histories are important to your credit report score. This means accounts that go into collection, foreclosure, and bankruptcies are harmful to your score. Ensuring these don?t show up on your credit report goes a long way towards improving your credit report score. And therefore, the accuracy of your credit report becomes more important than ever. Consumers need to check their credit reports at least yearly and make sure the information therein is accurate.
Credit report scores below 620 will require remedial work to bring up to an acceptable level. This may take extended amount of time, perhaps years. But its worth it. You must build a positive credit history that shows extended time of handling your finances in a responsible way in order to bury old negative information.
Refinance Your Home Loan
Refinance home loan lenders are eager to lend money to any individual regardless of credit as long as the homeowner has a fair amount of equity in the home and the home itself is in a condition that can be resold. Refinance home loans are different than a second mortgage or line of credit in that the proceeds from the loan disbursement first pay off the original mortgage loan. The remainder of the refinance home loan proceeds leaves the homeowner to spend the money as they wish. Typically, refinance home loans carry lower interest rates than purchase mortgages.
For a homeowner to obtain a refinance home loan, it is in their best interest to get a loan with an interest rate lower than the loan they already posses. Some borrowers prefer to re-extend their payment length back to 30 years, others prefer to use refinance home loans for the existing time left on their original loan. In order to determine the best deal throughout the life of both loans, in depth calculations will have to be done. Many Internet websites have interest calculators to make it easier for homeowners to determine how much interest is going to the lender before deciding if a refinance home loan is the most beneficial option.
Once a decision has been made to apply for a refinance home loan, the borrower must provide the lender with their social security number for a credit check. A credit report score directly determines the interest rate. It is recommended that before applying for various refinance home loans, the borrower receives a copy of his/her credit report from each of the three credit reporting agencies. If the credit score is low, then expect the interest rate on the refinance home loan to be high. If the credit score is high, then expect the interest rate on the refinance home loan to be low. Sometimes, easy measures can be taken to lift the credit scores. A credit report can look drastically different in only 30 days.
Refinance home loans gain extreme popularity when the interest rates drop nationally. It is an opportunity for a homeowner to save thousands of dollars in interest over the life of the loan, and to save hundreds of dollars in interest every month. Some homeowners use the refinance home loan to pay off their existing loan, and pocket the money for college, home improvement, or that vacation they have always wanted to take. The option to refinance a home loan is a great idea if a homeowner can lower an interest rate on such a large loan that extends for such a long period of time. It is no wonder there are many lenders out there that are advertising for individuals to consider getting a refinance home loan.
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