A quicker mortgage payoff saves big bucks
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
Raising a family, incurring all of the financially necessary support of food, clothing, shelter, healthcare, college tuition, the additional cost of living in expensive Orange County and tax heavy California along with the Great Recession seemed to have put a damper on the retirement nest egg of too many families.
I estimate that perhaps only 25 percent of my clients, which are typical Orange County homeowners, are on track for a financially feasible retirement where rice and beans will not be the necessary nightly dinner menu.
Some end up downsizing because they have to, not because they want to. Some are selling their motherlode of equity and leaving for cheaper parts of America. Others are working much deeper into their retirement years than they planned.
One way to empower yourself and to try to catch up for missed savings is bury the mortgage in a 15-year loan as fast as you can, and have that mortgage burning celebration that was common place in previous generations.
Nobody seems to be noticing, but the 15-year fixed pricing is very low right now.
According to monthly data from Freddie Mac that goes all the way back to 1991, the lowest average 15-year rate was tracked a few times at 2.66 percent in the past few years. June 2015’s average was 3.19 percent. The high mark was January 1995 at 8.8 percent.
We are only a half-point away from our lowest 15-year rate in 24 years.
Opportunity is knocking if you can afford and you are not afraid of the higher payment.
Locally, rates seem always to be more competitive than the national Freddie Mac survey. You can get a 2.5 percent rate locked in for 15 years (if you pay 3 points to buy that baby down). That’s as close to pure principal pay-down as you are going to find.
Take a $417,000 loan amount at 2.5 percent. The payment is $2,780. The total payments you will make are $500,500 plus about $15,000 in points and settlement fees.
Now compare that to a 30-year fixed rate at 3.5 percent using the same settlement charges. Your monthly payment is $1,872 and your total payments are more than $674,000 (plus the $15,000 of settlement charges).
The 15-year loan saves you about $173,500 dollars that you can add to your retirement account, hopefully earning growth of that savings to boot.
A 15-year no-cost, no-fee at 3.25 percent will give you slightly more interest deductions but will cost you almost $12,000 more in payments than the 2.5 percent rate. And, the 2.5 percent rate allows you the income tax deduction of $12,510 (the 3 points).
Provided that you will keep the loan until it is paid off, pay the points instead of the no-cost loan.
Twenty-six percent to 30 percent of borrowers refinanced into a 15-year loan from 2010 through 2014, according to data provided by Freddie Mac.
Ask your family or friends who own their homes free and clear just how good it feels.
NOTE: This week the Consumer Financial Protection Bureau announced they will postpone the lender required Aug. 1 implementation date of the new TRID disclosures (TILA-RESPA Integrated Disclosure) until Oct. 3.
Jeff Lazerson - Mortgage Columnist since 2011