Should you prepay, refinance or both?
Survey results show why some homeowners pay off their home mortgage early -- and why some reshuffle the deck in search of lower interest rates.
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Homeowners who are eager to pay off their mortgage prepay extra amounts to hurry up the process. But prepaying can sometimes become most profitable is when it's combined with a refinance to accelerate the payoff even more.
Keith Gumbinger, vice president at HSH.com in Riverdale, N.J., explains a few ways to get the benefits of refinancing and prepaying:
No. 1: Shortening the term. If you can afford a higher monthly payment, refinancing into a shorter term can help you save substantially on interest costs.
"Shortening your term is a prepayment methodology of its own, albeit a 'forced' rather than a "voluntary" prepayment method," Gumbinger says. "Once you've committed to the shorter term, you have no choice but to make the 'additional' payment, so some future flexibility might be lost."
No. 2: Pony up some cash. If you are in a negative equity position and not eligible for HARP and are looking to rid yourself of costly mortgage insurance or want to lower your payment even more, a "cash-in" refinance might be worth a look. (Bing: What is the Home Affordable Refinance Program, or HARP?)
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"Prepaying a few extra dollars each month will help build your equity, but it's still going to be a slow haul," Gumbinger says. "You might have to bite the bullet and put in another $5,000 now to get that refinancing opportunity."
No. 3: 'Pre-fi.' If your current interest rate is already low relative to market rates, the inconvenience and cost might not make refinancing "a strong compelling argument," Gumbinger says. But if you still want to save money, prepaying can help you do that even without refinancing.
"If you have a fixed rate at 4.5 percent and the best you can find in the market is 4 percent, your savings will be slight. You could say, 'It's not worth refinancing, but I'd still like to achieve a savings equivalent to refinancing.'" Gumbinger says. Just a few extra dollars per month can bring the same savings as a refinance, lowering the effective rate you pay without all the effort and hassle.
Why do homeowners prepay?
A recent HSH.com survey found that nearly 50 percent of respondents said they planned to prepay their mortgage. Here's why:
- 34 percent said they wanted to pay off their loan sooner.
- 32 percent said they wanted to cut their interest expense.
- 23 percent said they wanted to build equity more quickly.
- 5 percent said they already refinanced but wanted to save even more.
- 4 percent said they couldn't refinance, but planned to prepay so they could still save.
Respondents ages 18 to 29 were more likely to say they planned to prepay so they could build equity more quickly. Respondents in the 40-to-49 and 50-to-64 age brackets were more likely to want to save on interest expense and pay off their loan faster.
Why don't homeowners prepay?
According to the survey, here's why homeowners don't prepay their mortgage:
- 40 percent said they didn't have enough extra money each month.
- 22 percent said they were using any extra money to pay other monthly bills.
- 17 percent said they were using any extra money to fund savings or retirement accounts.
- 13 percent said paying off their mortgage sooner wasn't a priority.
- 8 percent said they thought paying off sooner wouldn't make much difference.
Respondents ages 18 to 29 were more likely to say they didn't plan to prepay because they were putting any extra money toward other monthly bills. Those in the 40-to-49 and 50-to-64 age brackets were more likely to say they didn't plan to prepay because they didn't have enough extra money.
Fifty-five percent of the respondents said they have never used a prepayment calculator to figure out if prepaying made sense.
- MSN Money: Try a refinancing calculator
With or without a prepayment calculator, it's always worthwhile to "have that conversation (about refinancing) with a mortgage broker," says Ronit Rogoszinski, a wealth advisor at Arch Financial Group on Long Island, N.Y.
"It may not make sense or it could be a wash. But if you have a high interest rate and a good credit score and you can bring the rate down, then we are talking about dramatic dollars," she says. "You want to run the numbers and see."
I would say this all depends on each individual's situation. If you can refinance get lower interest rate/shorter term and save in the LONG TERM, then this is ideal. However, you have to remember the costs that are involved-title search, new appraisal and all the paperwork to close your new loan. It's important to look at all the pros & cons before doing this.
This is really a GREAT IDEA for those who can get a good/better rate on loan, have plenty of equity and need to get out of debt (pay off revolving debt/credit cards and so forth). However, this is only good if you make that commitment to pay direct to your debtors and close the accounts. Have the bank cut checks DIRECT to those DEBTORS along with letter signed by you to close the account, leaving yourself only 1 open credit card for emergencies only. The good part about this is that you are debt free paying 1 loan payment and getting the tax benefit for any/all interest paid that can be used on your annual tax returns. It will also leave you more cash to invest in your retirement or pay extra on that mortgage every month!
My husband I did refinance after 3 years because rates lowered and we realized we could go from 30 year to 15 year with bi-monthly payments and save THOUSANDS in the long term. We don't have kids and all the expenses that go with that, so we were just fortunate that we could afford the costs it involved to do it.
It is good advice, like the article.
I did both,
Refied a 30yr lowering the interest from 5.625 to 3.50, it changed my monthly payment from 1,200+ a month down to 990+ a month. I match my principal payment every month and my new payment is still lower than my old straight payment.
The first mortgage officer I had told me always pay extra on your payment. Even if it's only 50$ a month it adds up over time.. Over the years I have always remembered that advice and followed it.
I also pay a little extra on my principal when I get my tax refund back every year.
It's a relief knowing if I have a tight month my payment is not going to break me.
Once we got down to 100 K I started a little tally sheet that has numbers from 100 down to zero......each time we cross another $ 1000 threshold I cross it off the list.......we're down to 65 and counting......I also have a piggy bank and anytime I get one of those dollar coins it goes into the bank.....when I finally get rid of the mortgage I'm gonna empty the piggy bank and have a party......you got make paying stuff off a game to keep yourself motivated.....
today banks and finance co. are worse than loan sharks. shame on you