Dennis' Mortgage Blog

Question of the week:  Should we pay extra on our mortgage to pay down the principal and pay off the mortgage sooner?

Answer:  This question begs for the classic answer in economics, “on the one hand yes…on the other hand no.”  Ask twenty mortgage professionals, twenty CPAs, twenty financial advisors and twenty airline pilots this question and you will get about half of each group saying, “yes pay off early so you can save the interest payments” and about half answering, “no do not payoff early use the leverage of our low payment and low rate as long as you can.”

When people ask me this question I answer with several questions of my own to lead them to the answer that is best for their personal financial situation:

·         How many more years do you think you will be in your home?

·         How many more years are left on your mortgage?

·         When do you want your mortgage paid off?

o        Is this date a long time after you plan on selling your home?

·         How much extra are you thinking of paying every month?

·         How many more years until you plan on retiring?

·         Do you have any outstanding credit or debt that is at a higher rate than your mortgage?

·         Will lowering your interest deduction cause you a disproportionate increase in income taxes?

·         Do you think over the period of time that you plan to make the extra payment that you can earn a greater rate of return on investing than the borrowing rate on your mortgage?

·         Are there any large expenditures in the future that you will need to cover with a large sum of cash or a large loan?  I.e. college tuition and living expenses? Extended health care for a family member? Braces?

·         How is your retirement savings plan? Are you on track to have enough money in savings to cover your projected expenses for twenty to thirty years after your intended retirement age?

Answering these questions leads most families to re-think making extra payments on their mortgage and instead use the money they intended to use to pay down their mortgage principal to pay off higher rate debt and increase their savings and retirement accounts. 

For those with little to no debt, with the exception of their mortgage, and doing well on their retirement saving, who plan on being in their home beyond the time frame they intend to have the mortgage paid off, the conclusion is to pay down their mortgage for early payoff. 

My personal outlook for those not intending to retire in their current homes, and even those who do in many cases, with a low mortgage rate on your home and the very high prospect of inflation in the coming year(s) where interest rates will climb—not only rates for borrowing but also rates paid for savings, CD’s, rates of return on investments, with the power of compound interest and dividend reinvestment homeowners will benefit more from adding extra money to their savings and investment at a higher rate than paying down a mortgage at a lower rate.

If you are paying 5.5% on a mortgage and inflation creates average return on investment rates of 10%, why pay off 5.5% when you can get 10%?  When/if the rates of return go below your rate of interest on your mortgage you can re-evaluate and look to pay down the mortgage if it makes sense for how long you will be in your home compared to when the mortgage will be paid off.

Cash is hard to accumulate; once you have paid down your mortgage you have transferred cash from a liquid asset you can easily and cheaply access to equity in your home that is difficult and expense to access.  In most cases my advice to those looking to pre-pay their mortgage is to over-pay their savings, investment and retirement accounts first. 

On the other hand…..

In the end it is your money and you need to do what makes you feel most comfortable.  Ask the questions, analyze the answers, create a plan and stick to it; be ready to adapt to future economic cycles but try to stick to your plan.

Have a question for me?  Ask me!   

Time is running out on the IRS tax credit!  If you are considering purchasing a home this year, are qualified and wish to take advantage of the IRS credit hurry and get into escrow.  All escrows must be closed by the end of business on November 30, 2009.  Are you qualified?  Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ

Mortgage Backed Securities have continued their positive march up the chart.  A significant amount of the gains are the result of the Federal Reserve purchasing program, a $1.25 Trillion commitment to purchase mortgage backed securities to keep rates low.  So far the Fed has purchased over $900 Billion and the program has worked as our rates have stayed low. 

Also impacting the market, the bond market that is, has been the increasing price of gold, in record territory over $1000 an ounce, and the weak dollar.  Much has been made of China’s investment in America with their purchase of debt from the Treasury, as of the end of July China holds over $800 Billion in Treasury securities, Japan $724 Billion and the rest of the world almost $2 Trillion—that was through July so the Treasury auctions of August and September are not in the tally.  A weak dollar makes our debt that much more of a bargain to investors.

When the dollar strengthens in the future those who purchased the debt will see an added profit when they sell their dollar based investments and convert to the weaker currency.  Remember when you are dealing in a billion, one-tenth of one percent is $1 million, one-tenth of one percent of $100 Billion is $100 million, big numbers for small changes.

In the auctions this week the Treasury sold 3, 10 and 30 year securities.  The 3 year auction was disappointing and of interest was that foreign investors made up less than half of the investors—hmmmm a sign of reduced foreign investing later? Lower demand creates lower prices which results in higher rates.  The 10 year auction went well and then yesterday’s 30 year auction was disappointing.  So a mixed bag in the over-saturated Treasury auctions this week.

A mixed bag is not real good news for interest rates.  As I have discussed before when economies and markets turn there is turmoil and mixed data, one day good, one day bad, one report good, one report bad.  Mixed results in treasury auctions could be the signal the investors are weary and future demand for the auctions will be low.  Unfortunately because of the massive debt being racked up in Washington there will have to be many more auctions for hundreds of billions, trillions, of dollars to finance our government’s expenses and spending.  Fatigue at this stage is a warning sign of higher rates as our Treasury continues to flood the market with debt to pay for itself.

On the economic data front initial jobless claims came in yesterday at the lowest number since the first week of the year. Woo-hoo!??  Unless you were one of the 521,000 filing that claim, then it is boo-hoo. As discussed in previous updates, unemployment must slow before it reverses, slowing initial claims is good news wrapped in bad news.  One number that tells us the difficulty in turning the economy around is that 3 million Americans are on extended unemployment benefits.  These are people who have been on unemployment beyond the normal time frame and are now on the extended benefit program for another 90-120 days.  Unemployment will continue to increase into the first quarter of 2010 based on current data, longer in California due to lack of manufacturing industries.

Ben Bernanke, Chairman of the Federal Reserve, said today that once the economy “regains some footing” the Fed will have to raise rates.  He gets paid the big bucks to state the obvious, but sometimes the obvious needs to be stated.  The question is when is that regaining of some footing going to happen and what will be the Fed’s benchmark to know it?  That is what investors are looking for.  From the tone of his message I think the Fed will act swiftly and aggressively, I think this because he did not say “when the economy has turned the corner” or “once economic growth begins” but rather “regains footing.”  That to me says before growth begins they will act.  We shall see.

Friday is the bad day this week, profit taking hits the mortgage back security market as rates continue to deteriorate all morning.  As can be seen by the chart we have lost all of last week’s and this week’s gains, all of it this morning.  Typically we see late rallies when we see this big of a movement down.  However, with the economic news and everyone looking to see when the growth will occur, when the inflation will start to come to market, we never know when a huge drop in prices signals the end of the run and rates have passed the bottom.  Does today signal the end and earlier this week was the bottom for rates?  We’ll know in the coming days and weeks.

Rates for Friday October 9, 2009:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              UP 0.25%

30 year conforming-jumbo 5.155%                   UP 0.25%

30 year FHA    4.75%                                      UP 0.25%

30 year FHA jumbo 5.125%                            UP 0.125%

Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount. 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Let me know what your mortgage needs are.  With the exception of a Green Dragons soccer match I am available on Saturday.  Sunday I’m available for phone conversations after noon.

For those in Southern California looks like we may get some rain mid-week, a good time to check homes and listings for leaks and where water pools!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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