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Payoff Mortgage?

Question: I now have saved $50,000 and my husband has saved $40,000 in the bank. We pay mortgage each month about $1,000 and we still have more than $120,000 to pay for 29 years.

My question is: should we pay off our mortgage within the next year? If not, what should we do or invest with our savings? How will we plan for the future? We have no kids. I have a retirement plan, 403 with my employer but my husband has nothing. My husband plans to retire next year but I'll keep working. Thank you very much. Sue, Grand Fork, North Dakota

Answer: I think in the heart of every homeowner burns an intense desire to say goodbye to the bank for the last time and own a home free and clear. It's a wonderful moment, and if you have the money there's nothing wrong with paying off the mortgage to live debt free.

That said, I'd like to throw a couple of cautions against your getting rid of the mortgage right away. For one thing, you're putting most of your financial eggs in one basket -- a home. That's another way of saying that your financial health is now dependent on how one asset performs in coming years and, as we are witnessing right now, home prices can go down as well as up. I'd prefer that you build up a well-diversified portfolio in cash, stocks, bonds, commercial real estate, commodities, and international equities. Your home will then shrink as a percentage of your net worth. Once you've built up a well diversified portfolio, then by all means pay off the mortgage.

What else could you do with the money? I'm glad to see that you're participating in your retirement plan at work. One idea is to create a long-term portfolio in a taxable account. This way you can access the money without paying the 10% penalty you have to fork over if you tap into your retirement account under the age of 59 1/2. To keep your annual tax bill down, I'd recommend investing a chunk of the money into broad-based equity index funds. For example, with an equity index fund that mirrors the Standard & Poor's 500 or the Wilshire 5000 you'll pay very little capital gains tax every year since there isn't a professional money manager churning the portfolio every couple of weeks. You will, however, pay taxes on dividend payments and when a company is taken out of the index, say, through a merger or acquisition.

Another tax saving tip is to put the fixed income portion of this investment into I-bonds. Inflation is every saver's nightmare. Even if inflation averages a low annual rate of, say, 2% to 3% over the next quarter century, that's still enough to depreciate the value of a today dollar by nearly half. The I-bond is a savings bond, and it shares many of the same attractive investment features as its better-known cousin, the Series EE savings bond. There are no commission costs imposed when buying or selling I-bonds. I-bonds are sold at face value (up to $30,000 a year) and earn interest for 30 years, although you can sell after five years with no penalties. You don't pay any taxes on the investment until you cash in the bonds. There's no credit risk since the I-bonds are backed by the federal government. Its value adjusts to take into account changes in the Consumer Price Index, and you're also paid interest on your money. (You can get much more detail about I-bonds at www.savingsbonds.gov.)

A final point: It seems to me that you're at a major transition point with your husband retiring and you continuing to work. It's at times like this that a fee-only certified financial planner (CFP) can help you create a financial blueprint for the next stage of life. The planner would help you look at your whole portfolio, your stream of income and savings, and match your finances to your lifestyle goals. And you can run by the CFP the ideas I've suggested to see if they will really work for you. Good luck.

12/14/07 by Chris Farrell

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The Bi-Weekly Mortgage Payment

Question: I have a monthly mortgage of $786.33. I've been offered a deal where I pay $394.17 every 2 weeks, or $1 more per month. They state I'll save $33,039.25 and knock off 8 years and 11 months. It sounds like a wonderful deal. Is there something I'm missing? Why would the mortgage company want to save me this money? Thanks, Mark

Answer: I can think of two reasons. The benign reason is that lenders are responding to the desire of many customers to shorten the life of their loan, and this is one among several options. Taking out a 15-year mortgage is another common tactic. The other reason for the service is that it's profitable. Lenders have made a nice sideline business setting up this kind of program, and they usually charge an initial registration fee and a stream of ongoing charges.

Since you're paying back principal faster through a bi-weekly payment plan, the life of a traditional 30 year fixed rate mortgage is typically shortened by about 10 years (with the program the mortgage will last somewhere between 18 and 22 years depending on the interest rate). Now, the mathematics of a bi-weekly payment means that it's the equivalent of writing 13 mortgage checks during the course of a year.

I prefer that people interested in this strategy do it themselves. It's a perfectly acceptable D.I.Y financial maneuver with no extra fees or additional charges. The easiest way to accomplish your goal is to make a 13th monthly payment on your own. (You can divide the money into a couple of payments if that eases the strain on cash flow strain.) In either case, put a note with the payment saying it's to go toward paying down principal only. By the way, another advantage of this approach is if money does get tight during the year you can always skip the extra payment.

That said, several years ago I got a similar question from a listener on the radio, and I gave a comparable answer. The next week I got a call from a woman who strongly disagreed with me. If I remember the details right, she was a single mother with a demanding job. She wisely turned as many financial obligations as possible into automatic payments. Otherwise with her hectic schedule it was far too easy to forget a bill or to put money aside in savings. She signed up with her bank's bi-weekly mortgage program because it was one less thing to worry about. It worked for her.

01/04/08 by Chris Farrell

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Payoff Mortgage Early?

Question: I plan to retire most likely sometime next year. I have a 30 year fixed at about 6.5%. I'm 5 years into the payments. If I have the liquidity to do so, should I pay off my mortgage?

Answer: One of my favorite financial advisors, Henry "Bud" Hebeler, recently sent me his answer to this question. I've answered this question on the blog so I thought I'd like to share his response to give you another perspective.

Bud was president of Boeing Aerospace, and when he retired he was disgusted with much of the financial advice offered to future and current retirees. He now runs a website--www.analyzenow.com--that's full of good advice.

Here's his answer: The technical answer is that IF the after-tax earnings on your investments is more than the after-tax interest on the debt, you shouldn't pay down the mortgage.

The problem is that you have to guess at returns over the next 20 to 30 years and hope that there are no huge market drops. Also, you have to guess whether you'll be able to deduct mortgage interest over a long period. For those reasons, many financial planners believe you should pay off the mortgage early. I think you also have to consider the amount of money you have left after paying off the loan, and whether you could get as good a deal on a new loan should you ever need one considering such things as the future interest rates and paying closing costs again. You might want to make a side-by-side comparison of your two alternatives using one scenario starting in 1948 (a very good year to retire) and then changing to a 1965 (a very bad year to retire) comparison using the Dynamic program on www.analyzenow.com.

When things are uncertain, I'm often in favor of a compromise. Perhaps you could pay off half of your loan or accelerate payments should you be able to do this without loan penalties.

I like the compromise idea. Too much of personal finance is divided into an either/or construction when compromise is often the best solution.

01/18/08 by Chris Farrell

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Refinancing Mortgage

Question: Hi, I have an ARM which is just adjusted to 5.75% (and it'll increase to 8.5% next December). I owe $120,000 on this. I have a 2nd mortgage which has an 8.5% interest rate. I owe $23,000 on this. I want to get out of my adjustable rate and into a fixed rate but do not know the best way to do this. My mortgage broker told me to sit tight and advised this is not the time. However, I really feel I need to refinance before December 2008. Also, I paid about $163,000 for my condo 3 1/2 years ago. At that time it was appraised at $173,000, but the mortgage broker believes the appraisal value now may only be $145,000 - $150,000. What should I do? Please HELP. Thank you, Jeanie

Answer: Ignore your mortgage broker. He's probably correct that the value of your condo is down. But you're right to be aggressive about your mortgage situation. The same goes for anyone who's stressed out about their future mortgage payments.

For one thing, the recent cut in interest rates by the Federal Reserve may make it more practical for many homeowners to refinance. The conventional fixed rate mortgage is currently at 5.7%. It's at the lowest rate since the fall of 2005. For another, banks and other financial institutions are under a lot of federal, state, and regulatory pressure to work with financially stressed homeowners. It pays to reach out now when they have every incentive to treat you right (at least compared to the past).

I have a couple of suggestions. Do some of your own research and familiarize yourself with the mortgage market at a couple of online portals, such as www.hsh.com. HSH has a good articles library, and for a fee you can get the loan terms of lenders in your area.

Next, while I'm a big believer in doing research online, it always pays to talk to people in person when it comes to money. If you have a checking or savings account at a brick-and-mortar bank or credit union, introduce yourself to the loan officer. Spend time with her (or him). Let her run some numbers for you. If the numbers don't quite add up, stay in touch and work with her. In other words, develop a professional relationship.

Lastly, there are non-profit institutions in most metropolitan areas that specialize in helping troubled or confused homeowners cope with their mortgage issues. Contact them.

01/23/08 by Chris Farrell

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Refinance?

Question: I purchased my house three years ago with a 5-year ARM and a second mortgage to cover the down payment. My credit was (and is) good, and the interest rates and payments on both loans are low (about 5%-6% on the loans). I purchased my house just before property values climbed here, so the value has appreciated and the market has not crashed as in other places. When I purchased my home, my job was only supposed to last two years, so I expected to move long before the interest rate started to adjust. My job has now lasted 3 years, and it is no longer certain that I will move out of town before the 5 year mark. Should I refinance the house now just in case I don't move, or wait to see what happens with interest rates and lenders? The interest rate will start to adjust in October of 2009 and I have heard that 2009 might be a better time to refinance a home because the market is expected to have stabilized. Thank you.

Answer: Clearly, you have a good rate and the time to decide. By the way, I'm also a fan of 5-and 7-year adjustable rate mortgages. The rate is usually attractive and you buy time to decide on your next move.

Of course, I have no idea where interest rates will be in 2009. I do think the recent drop in mortgage rates makes refinancing over the next couple of months an attractive proposition for anyone with a good credit score and borrowing record--like you. The rate on a 30-year fixed rate mortgage has dropped to 5.54% (the last posting I saw). If I were you, I'd be running some numbers now to see whether you can 1) get rid of the second mortgage and 2) calculate the point where it makes sense for you to buy an "insurance" policy and long-term piece of mind by refinancing into a conventional 30-year fixed rate mortgage.

Of course, I don't have the answer, but my guess is that it's sooner rather than later.

01/29/08 by Chris Farrell

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Selling A Home

Question: My husband and I own a one-bedroom condo in Brookline, Massachusetts which has a pretty strong real estate market, but has dwindled some with the recent downturn. We currently have a 5/1 arm at a 3.75% interest rate and have lived in our home for 2.5 years. We are not yet sure if we will sell in the next couple of years or if we will keep the home, refinance to a fixed-mortgage and then pull out some equity to buy a larger home and rent this one-bedroom out.

With the recent lowering of interest rates do you think we should consider refinancing now even if it increases our current monthly payment, or do you think we should wait until we are closer to selling? Thanks! Adrienne

Answer: For people in circumstances like you, without any immediate pressure to refinance, a big part of the answer comes from your need or desire to take out an "insurance" policy. Of course, I have no idea where interest rates will be in two to three years. I can just as easily make the case that they will be lower or higher or the same (mostly depending on the outlook for inflation).

Instead of an answer, I have a bunch of questions. Probably the most important is: Will you sleep easier at night locking in today's low rates, even if it turns out two years from now that you would have come out ahead financially by standing pat? Is the price of that interest rate insurance policy worth it to you? Or will you be filled with regret? In the past, I've stuck with my 5-year adjustable rate mortgages and I was comfortable with the gamble (and in each case I got lucky). However, considering all the turmoil in the economy and financial markets I might act differently this time if I were in similar circumstances.

Other factors that can influence your decision: How stable are your jobs? And how realistic is it for you to become landlords? When you look at all of your assets and liabilities, where are you comfortable taking risks with your money and where would you like to buy some stability? And, of course, will you be moving in two-to-three years?

I realize it's often annoying to have a good question answered with a string of additional questions. But hopefully they'll lead you and your husband to an answer.

02/05/08 by Chris Farrell

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Selling A Home in a Down Market

Question: My family lives in a 107-year-old house. We have dreams about a slightly newer home with more yard and more practical family space. We've talked about selling for about two years now, but have watched the market get worse and worse, and our home value drop from near $400,000 to maybe $300,000. And our friends fret as their houses sit on the market for months.

We're tired of being stuck in limbo, but I'm completely freaked out by the idea of living with two little boys in a house that needs to be market-ready 24-7 for the months it may take to sell.

Still, we're talking about biting the bullet and placing the house in the market this spring. Should we get a bridge loan and move out of our house before we ready it for the market? If not, what kinds of resources can you recommend as we get ready to sell? And how do you recommend we find out the true market value for our home? Thanks! Maria

Answer: I wouldn't take out a bridge loan, especially in this market. Bridge loans are expensive, and you could end up holding it for far longer than expected. There's always the risk that potential buyers don't bid on your home. Then what?

Now, it can be a pain keeping a home clean and presentable with two young, active children. But that pressure is nothing compared to the pressure of a bridge loan gone awry. It would be far better--and cheaper--to hire a cleaning service for the time your home is on the market. I would also find a realtor who's used to working with couples with young children, and can work with you on scheduling buyer viewings. You can structure visits by potential buyers to your home. No need for it to be ready for "show" all the time.

The value of your home is a moving target, as everyone wonders "Where is the real estate market bottom?" But you can get a good sense by spending time on websites like zillow.com. Real estate agents will also print you a list of prices for comparable home sales in your neighborhood in recent months.

In the next several years, I expect more families in your situation to opt for remodeling over moving. Homeowners are in a much better bargaining position with contractors. Remodeling prices should be much better than even a few years ago with the downturn in the housing market and the economy. With business falling off, contractors should be more willing to negotiate and strike a reasonable deal. I don't know if that works in your situation, but it's an alternative to research.

02/07/08 by Chris Farrell

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A Home Equity Line of Credit

Question: Hi - I have a $10,000 home equity line of credit (HELOC), which was essentially a 2nd mortgage when I bought my home 4 years ago. The balance of my HELOC is now $0; I do not plan to make any future HELOC withdrawals as I have a substantial "emergency" cash fund. (My primary mortgage balance is $190,000.)

Is there any reason to keep the HELOC open, such as for tax or credit score reasons? Or, am I better off officially closing the HELOC account? I may sell this home in 1-2 years. Thanks for your guidance. Stephanie

Answer: As far as I am concerned there are two good reasons for keeping a home equity line of credit open. The first is that it acts as an emergency store of funding. The second reason is to pay for renovation projects over time. In your case, neither reason applies. Another factor to check out: Some banks charge "inactivity" fees. You don't want to pay for that.

That said, here's why most people would advise you not to close it: Your credit score. When it comes to credit scores the longer you've been doing business with a lender--and making your payments on time--the more you're rewarded with a high score. It's a numerical calculation that bothers me for two reasons. First, I do worry about keeping unused accounts in an age of identity theft. And secondly, financial common sense says if you're no longer tapping into a product, end the relationship. The only beneficiaries of this credit score formula are lenders who can always hope that by keeping the account open, you'll eventually start using it again.

Here's a way out of the conundrum. If you aren't going to be taking out a new mortgage, a mortgage refinancing, a car loan or some other big ticket borrowing for a couple of years, go ahead and close the account. The dip in your credit score won't matter, and with time by maintaining payments on other debts your credit score will climb back up. However, if there is a major transaction in your future, I'd keep the account open. In your case, I'd leave it alone for now since you may sell your home in a year or two.

02/14/08 by Chris Farrell

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Saving for a Home

Question: I am 27, married with my fourth kid on the way. I'm currently a full time student and working 30hrs a week at Starbucks, and my wife is a stay at home mom. Within this situation, we do not make a lot of money, but I do receive quite a few scholarships and grants that more than cover school and bills, and we don't have any debt. We'd like to start saving some of this extra cash for our future home, which we plan on buying in about 5-7 years. I have looked at putting the money into CDs, but I want to know if there is a better way of maximizing a return on the money. Thanks for your time, Glen

Answer: I think you and your wife could teach all of us a lesson or two about the art of living well with little money--without taking on debt. In your situation and with your homeownership goal, there's nothing wrong with parking cash in bank certificates of deposit. And as long as the value of the CD is under $100,000 there is no credit risk, either, since they're FDIC insured. I'd would look at the after-tax yield you're earning on the CDs to the aftertax yield you could earn on a comparable Treasury security. I would put my savings into whichever one is paying you a better aftertax yield.

But let me toss out a couple of other options for you to consider.

First, in this period of uncertainty, when the Fed is combating recession while crossing its fingers when it comes to inflation, putting money into a brand-name, conservatively run money market mutual fund can pay. The reason for putting money in "cash" is if inflation stirs and interest rates go up, the money market fund will start paying you those higher interest rates quickly.

Another option is a short-term bond index fund. Fees are low with bond index funds, and the portfolio itself is well diversified. You should earn a slightly higher yield in a fund like this, but at the cost of increased volatility.

My last idea is to consider adding a thin stock market layer to your savings, say, through a broad-based equity index fund. My thought is that quality stocks are getting progressively cheaper (they'll probably head even lower in the months ahead). Your time horizon is long enough to justify taking on some extra risk to meet a specific goal. If everything works out, the finances of home buying will be that much easier. But if the market is down when you're putting together a down payment--and it doesn't make sense to sell stocks--the stock market portion of your portfolio won't be big enough to prevent you from becoming a first time homebuyer.

02/20/08 by Chris Farrell

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The Hike in Mortgage Loan Limits

Question: I understand that the stimulus package includes a provision to raise the cap on conforming loans (i.e. when loans become jumbo). When can we expect to get loans at the new rate? Thank you.

Answer: You're right about the provision. The Department of Housing and Urban Development still has to determine the final loan limits by region. The new temporary limits will go into effect in early March and the idea is for them to last until the end of the year. The limits involve mortgages backed by giant mortgage securities firms such as Fannie Mae and Freddie Mac.

The problem was that the credit crunch and housing market debacle made lenders wary of writing jumbo mortgages. The conforming mortgage limit for Fannie Mae and Freddie Mac was a ceiling of $417,000. Any mortgage above that was considered a jumbo. The interest rate gap between a conforming mortgage and a jumbo is normally 0.25%, but thanks to the housing market nightmare it had widened to about 1.0%.

The new legislation changes the conforming loan limit to 125% of an area's median home price, with a new upper limit of $729,750. Clearly, the new limit was picked with San Francisco, Los Angeles, New York, Washington D.C., Miami, and other high-priced coastal cities in mind. The idea for the temporary hike in conforming loan limits is to make it easier for owners of expensive homes to refinance and for would-be buyers to get a better interest rate.

However, the impact of the change has been muted so far. A conventional 30-year fixed rate mortgage is currently 6.05% while a comparable jumbo mortgage is 6.94%. I'm skeptical the shift in loan limits will make much of a difference in the housing market over the next several months.

02/29/08 by Chris Farrell

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Interest-Only Mortgages--No

Question: My husband and I recently attended a workshop on optimizing real estate assets. The program presented information on how to create a debt and cash flow management strategy, optimizing real estate assets to build wealth. In other words, they recommend taking the asset of your home, and have that money work for you to build income. One of their recommendations is to obtain an interest-only loan, which will allow you to take greater tax benefits and spread your mortgage over the longest term so that you can invest money that you would put towards a shorter term (15 yr vs 30 yr.) What do you think of this idea? Thanks, Susan, Boulder, CO

Answer: No. No. No. It's by following financial advice like this that a number of homeowners have fallen into dire financial straits. Interest-only mortgages are highly risky. Stripping out the equity in your home to invest in other (risky) assets is very hazardous to your wealth.

03/21/08 by Chris Farrell

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From CDs to Mortgage?

Question: I have a $240,000 fixed rate mortgage at 5.75%. My monthly PITI payment is a little under $1,900/month. And I get by OK on my retirement and cash flow from a rental. I'm 58 and single, and I'm able to file an itemized return.

Now that CD rates are falling, I was wondering if it made sense to divert some of the expiring CDs' funds into the mortgage. My mortgage is recastable, so I can lower my payment for every $10,000 I chunk into it. What's more, I can't get anything like 5.75% on any safe investments. I'm gun shy of The Market right now. What's more, I have also been turned off by most stocks' stingy dividends. I do have some mutual funds and some utility stocks.

I could throw-in up to $100K and still have around $200K in cash left in CDs (not including IRAs). That amount would take the mortgage down by around $700/month. Basically, that extra money would provide me with extra spending money or money to pay off the mortgage principal. I have around 25 years left on the mortgage.

Does this make sense from the perspective of "tax savings?" I would have less taxable income at non-preferential rates from the CDs, but I would have a smaller interest deduction. Is this deduction worth it? Anonymous.

Answer: I think you have already answered your question. There is nothing wrong with paying down your mortgage early and, you're absolutely right, you lock in a 5.75% rate of return. And while the tax deduction helps, it isn't that valuable compared to the what you will save in interest. If you scroll through my previous answers on this question you'll see that I worry about homeowners putting too much of their savings into one asset--their home--and not enough into stocks, bonds, international securities, and cash. But you have accumulated a good amount of savings, and accelerating payments on a mortgage (or any debt) is a sound strategy for the risk averse--especially in this market.

04/03/08 by Chris Farrell

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A Big Downpayment?

Question: I am searching for a new home (main residence) and was wondering whether I should use a huge downpayment and dent my assets or take a large loan and keep some assets, considering inflation, decreasing mortgage rates, and current turmoil. Thank you -- I love you show. Thank you for not printing my name. Anonymous.

Answer: I wonder what you mean by a "huge downpayment"? The traditional figure of a 20% downpayment is good benchmark. I wouldn't strap myself for cash--a home take money to maintain--to far beyond that percentage. And with the economy is recession or near-recession I'd want to have a healthy cash emergency safety net. Call it your "just-in-case" money. You can always accelerate principal payments on your own if it makes sense.

04/08/08 by Chris Farrell

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Downsizing

Question: My wife and both turn 50 this year. Our son is graduating college and our daughter enters college this fall. We are downsizing into a smaller home, purchasing with cash. We'll then sell our current home. I've looked forward to being "mortgage-free" for some time, but several of our friends suggest losing the tax advantage is a bad financial move. Chris, what is your opinion? Tom, Charlotte, NC.

Answer: First of all, from a financial point of view it's really smart to make a downsizing move while you're still working. You'll save a lot of money--no mortgage, lower property taxes, cheaper utility bills, and so forth--and you can salt away at least some of that money for later on. In a sense, it's a smart savings strategy. Secondly, I don't think the mortgage deduction is all that important to your bottom line. Sure, it helps. But it's far better to enter your Golden Years owning a home without a mortgage. This way you have a solid equity foundation for your overall portfolio. Go for it

04/15/08 by Chris Farrell

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Remodel Home?

Question: We are currently faced with a dilemma. My wife and I bought a home years back with the eventual assumption that we would outgrow it and have to move into a larger place. Since that time, we have had two kids and fallen in love with the neighborhood. Our kitchen is outdated, with buckling countertops, our furnace is over 30 years old, and we've got no room to store clutter that comes along with kids. (Legos can be particularly painful to bare feet.) We'd really like to stay put and get an addition and replace the dated things that need replacing, and have a place for storing everything. Our worry is now the best time to do these things? The economic down turn... or recession has us concerned. We have very little debt, other than the current mortgage. We are able to pay our bills and save a little for retirement and college for the kids. Are we making the right decision to add on to the house? Rob, Bel Air, MD.

Answer: Whew, I can relate to the pain of walking on Legos. I think the current housing turmoil means more people in circumstances like yours will pick remodeling over moving. (Plus, as you say, you love the neighborhood.) The remodeling industry boomed along with the surge in real estate prices, according to Harvard University's Joint Center for Housing Studies. The remodeling market in 2007 breached $290 billion, up from an annualized $85.3 billion in the final quarter of 1997. It's during these boom years that remodeling horror stories became common currency among homeowners, from contractors doing shoddy work to walking away from incomplete jobs. Although the remodeling market has held up well compared to the housing market, activity will slacken if history is any guide. While the cost of drywall, composites, and other materials is up, labor is plentiful and many contractors are eager to keep their crews working. There is more room to negotiate than before, but I think the real gain is better work for the price paid.

That said, if you do go the remodeling route remember that it will only "pay" as a long-term investment. You'll lose moeny if you end up moving soon. The general rule on renovations is that you will only recover about 40% of the cost of any work done, with kitchens and bathrooms having the highest return on your money and luxuries like swimming pools the least. I'm sure you've already gone over the details with your contractor, but you can check out the numbers at Remodeling Online . Again, it's clear you don't want to end up with too much debt, so prioritize the project and figure out what you might want to do later. So, assuming you stay conservative with your finances, owning a remodeled home in a neighborhood you love will add to the quality of your family's life. And that's worth a lot.

04/18/08 by Chris Farrell

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Mortgage Accelerator Programs?

Question: My husband & I are both retired. We have parent loans for our 3 children's college expenses. We have a $20,000 home equity loan but no other debt. Recently we were approached by a friend to look into u1stfinancial as a way of paying them off sooner and decreasing interest. Do you have any information or advice regarding this company? Carol, Pine City, NY

Answer: We've been getting a lot of questions about United First Financial and its Money Merge Account. Full disclosure: I'm not a fan of the product.

Here's how the company describes the money merge account on its website.

The Money Merge Account system is a powerful tool that enables homeowners to pay off a 30-year mortgage in as little as one-third of the time, without refinancing their existing mortgage or increasing minimum required monthly payments. The system incorporates the homeowners' checking and savings accounts with an advanced line of credit (ALOC), then helps to strategically and incrementally position their money where it provides much more financial benefit than "sitting stagnant" in a standard checking or savings account until it is otherwise needed. Complex financial details programmed into the Money Merge Account software help to better educate the homeowners and assist in some of the greatest time and interest savings possible.

Got that? There are a number of comparable products on the market. The bells and whistles may differ, but it looks like the basic idea is the same. You set up a special home equity line of credit off the value of your home (which is getting harder to do and more expensive these days, thanks to the credit crunch. As I understand it, you could use a personal line of credit or a credit card, but the latter at least sets off all kinds of alarm bells.) When you get your paycheck it goes into the line of credit, decreasing your mortgage balance and, after paying your bills from the account, the remaining money keeps your mortgage balance down. The software costs for $3500 for the Money Merge Account, and other programs also charge for their software.

Carol, as I mentioned above, I'm not a fan. In essence, I think these programs boil down to a complicated and expensive way to keep a household to a very tight budget. If that's what you want to do there are other, cheaper ways to map out and maintain a frugal lifestyle. Perhaps more important, I worry about homeowners pouring so much of their discretionary income into their home. It's nice to own your home free and clear, but it's also important to build up a well-diversified portfolio with a well-funded emergency cushion.

And if it makes sense for you to pay off your mortgage early, well, you can do it on your own without paying for special software. Just make extra payments to pay down principal. A classic approach is to make an extra monthly payment a year. By writing 13 monthly mortgage checks instead of 12 you'll pay off that loan faster. Just be sure to tell the bank in writing to put that extra payment toward principal. Last, Carol, these mortgage loan accelerator programs seem to violate a time-honored financial motto: Keep It Simple.

05/02/08 by Chris Farrell

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Points?

Okay, I've learned the hard way that I can't stay in a hotel without a good Internet connection just to save a few bucks, It isn't worth the time and aggravation. Anyway, since I couldn't post yesterday, here's an extra one for today.

Question: How do I see whether it's a better deal for us to refinance, say, at 5.8% with closing costs of, say $5,000 or to go with an offer with no closing costs but at 6.5%? It has to do with time to recoup the closing cost expense and time we plan to be in the home...? Are there amortization schedules (is that what you call them?) that can be run to show me the comparisons? Thanks much for any help! Johan, Ocoee, FL

Answer: Yes, there are a number of calculators on the web. For instance, you can go to www.dinkytown.net. In its mortgage calculation section there is a "mortgage points calculator." This way you can weigh the trade-offs. In general, the big advantage of a no-points mortgage is that it's cheaper if you end up refinancing at a lower rate within a reasonable period of time (or end up moving within a few years). The advantage of paying a point or two is that you buy down the interest rate, which can pay off over the long run. The mortgage calculators will give you concrete numbers to work with.

05/15/08 by Chris Farrell

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Mortage Paydown and Baby Boomer Retirement

Question: I am 55 years old, earn $62,000/year and I have a mortgage on my condo slated to pay off in six years (2014). My current mortgage balance is about $35,000 @ 5.25% APR. I have an account with a major brokerage house with a current value of approximately $54,000 and could sell some securities to pay off the balance on the mortgage now. (I have a 403B and an IRA in addition to the stocks I refer to above for my retirement.) I am wondering if the market might be in for a real bust as us baby boomers begin to retire. Should I pay off my mortgage now by some of selling my stock, and forfeit my mortgage interest tax deduction? I enjoy listening to your program. I am a member of my local NPR affiliate, WUOM, 91.7 Ann Arbor, MI. All the best, Mark

Answer: There is a popular idea that consistently pops up. Call it Malthus Visits Wall Street. Simply put, the notion is that there are too many baby boomers, and they will overtax the economy's resources. Home prices adjusted for inflation will fall for a long time with hordes of elderly home sellers and not enough young home buyers. When they retire and draw down their private pensions, the massive asset sale will depress stock and bond values, leaving boomers with less money in their golden years.

I don't think that investors should fear the march of time. For one thing, an aging population in a computer-dominated economy is working longer than previous generations. Far more important is the move toward market economies around the world. The spread of private property rights and openness to the world economy is encouraging vast amounts of capital to flow across borders. By the time boomers need to sell, markets will be far more international. Baby boomers will sell their stocks and bonds into a global economy full of Indian, Chinese, Brazilian, and other foreign investors.

When it comes to real estate, the picture is a bit more complicated. We're going through a tough downward cycle after the decade-long boom. But the market will eventually stabilize. Overall, I expect housing will remain an appreciating asset. However, here is one wrinkle to think about. I wouldn't be surprised if a surprising number of aging boomers decided to downsize. The demand for smaller homes could soar (since first time homebuyers will compete for the same properties) while the demand for McMansion type homes will lag. Overall, housing should be a healthy asset, but smaller homes could enjoy stronger demand than bigger ones (with the exception of the true luxury market).

For most people, I think it's important to be debt free in retirement (i.e. no mortgage). But it's also critical to enter your golden years with a well-diversified portfolio. There's nothing wrong with paying off your mortgage early. But you shouldn't feel that you have to. You have a good rate, and time is on your side.

05/19/08 by Chris Farrell

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A Wedding and a Mortgage

Question: Hi Marketplace, I've got a couple good things going for me right now. I just got a new job that pays a lot more than my old one, and I'm about to get married. Instead of having a regular registry for pots and pans, we're asking our guests for donations towards our "Mortgage Fund" to try to put a down payment on a place to live. Now, we're not quite ready to get a house...but we're thinking within the next year or so we'd start looking (pending, of course, what the market does).

My question is this: what's the best way to "park" our money for a year while we wait to buy a house? Is there a "Mortgage-specific" type of savings account that might yield a better return than a CD? Thanks for your time, Iseri, Chicago, IL

Answer: Congratulations on all the good things happening to you. I wonder if your idea is a sign of the times? A lesson of the housing boom and subsequent bust is that first-time homebuyers should buy themselves a margin of safety by putting in a greater downpayment than was necessary during the go-go years. It's an intriguing idea.

Yields are razor thin these days. But I wouldn't reach for yield with this "home" money. (For a harsh lesson on the cost of reaching for yield just look at the busted auction rate market. The stuff was marketing as safe, but higher yielding short-term debt, and now investors can't get their money out.). I would stick with a brand-name money market mutual fund with very low fees and no charges for putting the initial investment in and adding sums later into the fund. I would pick a conservative money market mutual fund option, one that invests heavily in U.S. Treasury bills, short-term federal agency debt, and blue-chop commercial paper.

Good luck.

05/28/08 by Chris Farrell

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Home Equity Loans?

Question: A) Love the show. B) In these uncertain economic times, am I better off getting a Home Equity Loan, or a Home Equity Line of Credit? Oh, and, what the sam-hell is the difference? Joel, Milwaukee, WI

Answer: I'm glad you love the show. Let's do the definitions first. A home equity loan (also called a second mortgage) is a lump sum of money. You pay it back on a regular basis over time, just like a mortgage. A home equity line of credit allows you to write a check (or use a special credit card) whenever you need to borrow against the equity in your home. The interest rate is typically fixed with a home equity loans, and the rate fluctuates (depending on the market environment) with a home equity line of credit. In both cases the equity in your home acts as collateral.

In general, a fixed-rate home equity loan is tailor-made for major remodeling projects, such as a new kitchen or bathroom. The variable-rate home equity line of credit is better for smaller projects that are accomplished over a longer period of time.

Now, I'm in the camp that says the money borrowed against the equity in your home should go toward improving the value of your home and the joy you get from living in it. This isn't money you tap for expensive vacations.

However, one additional advantage of a home equity line of credit is that it can be part of your emergency savings. In case of a financial emergency, say a major medical bill or a lost job, you can use the line of credit to help tide you over.

06/05/08 by Chris Farrell

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Questions answered on air for June 7-8

In this edition of Getting Personal, Chris and Tess talk about private mortgage insurance, 457s vs. 403(b)s, removing a co-signer and borrowing from a 401(k).

Listen to this week's segment

Continue reading "Questions answered on air for June 7-8" »

06/07/08 by Richard Core

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Buy A Home--Or Wait?

Question: My daddy taught me that rent is a waste of money, and my family has been renting for a year after relocating from NC. I'm ready to buy a house by September 1st at the latest. I think I'll be happy with the balance between falling prices and favorable interest rates (before they head up even more) by September. My husband thinks we should wait another year and continue to rent. Our price range is low in this market, between 450,000 and 550,000 and we've seen some homes in which we'd be comfortable with our two boys, 2 and 4 years old. Also, I want to move close to the school I've chosen for my oldest for kindergarten. I'd hate to move to another apartment. Is it too soon to buy? Will I regret jumping into the market in September, possibly before the prices hit rock bottom? One more thing--we can put down between 10 and 20%. Does it matter if we put down 10%? Thanks for any input you can provide. Jeri, North Hollywood, CA

Answer: Here's the safe forecast: You know once you buy a house prices will come down some more. Hitting bottom is a matter of luck. I also don't think you should feel any financial pressure to move. My own guess is that that the downward pressure on home prices isn't over, and there won't be any financial penalty for any potential homeowner that waits. (But that's a guess, of course.)

Lifestyle reasons may push you toward moving sooner. For instance, you already know what neighborhood you want to live in, and the kind of house you'd like to own. So, I would work with a real estate agent to really dig into the neighborhood. I would talk with a banker to see what kind of loan and rate you will get in this environment. I would be choosy and tough in any negotiation. In other words, be willing to walk away. But even if you miss bottom--which is highly likely--that may be okay for lifestyle reasons and assuming this is a long term investment. Put somewhat differently, both you and your husband are right, so use that knowledge in your favor when looking to buy a home.

The 20% vs. the 10% is really a number crunching exercise. You'll get the best rate on a 30-year fixed-rate mortgage with 20% down in the current environment. And, if you can do it, 20% is usually preferable. The reason to put in less than 20% is not to tie up all your savings in one asset. I'd run the numbers, look at the trade-offs, and then decide what works best for your family finances. You will pay PMI or private mortgage insurance with less than a 20% downpayment.

06/16/08 by Chris Farrell

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Adjustable Rate Mortgage

Question: Is there a source to which you can refer me that would state the average interest rate of the One Year T - constant maturity, over the past decade or two? We currently have an adjustable rate mortgage tied to the 12 Month Average of the One Year T, Constant Maturity. At present, the rate is not so bad, but we are all too aware it goes up and down. I am wondering if there may be an advantage to sticking with what we have, knowing that sometimes it will take a bigger bite out of our budget than others. In essence, if you can weather the peak interest rates, is it worth sticking with an adjustable rate for the valleys that are also part of the ride. Thanks. Brian, Pacific Grove, CA

Answer: The data is produced by the Federal Reserve Board. You can find both current and historical data at www.federalreserve.gov/Releases/H15/. Another data source with some nice tables is at www.moneycafe.com/library/cmt.htm.

I don't dislike adjustable rate mortgages. I've had two, and both worked out well. But I now prefer the certainty that comes with a fixed rate mortgage. I think it's a better financial product for most people. But not all.

In essence, the question about an adjustable rate mortgage comes down to 1) how healthy is your cash flow and 2) if the financial world conspires against you and interest rates go up sharply over several years how deeply will the higher mortgage payments affect you? You're weighing the advantages of lower interest rate payments against the risk of higher payments. Is that a reasonable gamble for you to take?

The big advantage of a fixed rate mortgage is that you always know what your payment will be. It doesn't matter if interest rates go up. However, if rates do tumble, you can always refinance at a lower rate.

06/20/08 by Chris Farrell

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A Bigger Mortgage?

Question: Hi Chris! (please withhold my name if you use - thanks!)... I am 36 years old and about to marry for the first time (my fiancé is also 36). He owns a teeny home which he purchased 4 years ago (a duplex) that he will sell and we would use the equity to purchase a larger home since we feel we'll soon outgrow his place if we have a child, and it's actually quite tiny for even the two of us. I am strugging with whether or not we should buy. The mortgage payment (with taxes, etc) on the house that we are interested in purchasing would be about 30% of our combined gross incomes. I have heard that 25-30% is what you shoot for. Everyone tells us to "stretch" and buy more house that we think we can afford, assuming that our income will increase over time. Here's the catch -- I am self-employed, and so if I have a child and stay home for even just 6-8 weeks, I will lose money as I don't have any "paid time off." Plus, being self-employed, my salary can potentially vary (though it hasn 't over the last 2 years that I have been doing this full-time). Is it a mistake to take this on when we know that my income will *decrease*? My fiancé will probably get annual raises of 5-6%.... Thanks so much! Alexandria, V.

Answer: Don't do it. DON'T DO IT. Among the worst pieces of conventional financial wisdom is to "stretch" to buy a bigger home. It's a recipe for money trouble.

You have a lot going on in your life. Getting married. Starting a family. You're self-employed. What if your husband-to-be doesn't get 5% to 6% raises, but only 2% to 3% during a recession--or even no raise? Why add mortgage stress into the mix?

What's more, when you buy a bigger house you take on more than a larger mortgage. Property taxes, heating bills, air conditioning, and all the other costs that go into running and maintaining a home are higher. I'd rather that you put more money into savings--from cash to stocks and bonds--rather than into bigger mortgage payments.

No, I would stay financially conservative so that you can focus on married life and your work. If your incomes go up, you and your husband can always move to a bigger home. But by then you'll have built up the strong foundation of a healthy balance sheet.

07/01/08 by Chris Farrell

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A DIY MOrtgage?

Question: Dear Mr. Knows-a-lot-about-financial-stuff,

My niece and her new hubby are looking to buy a house, and are well-qualified for a mortgage. She does not like the idea, however, of all of their payments going to a bank and would rather "keep it in the family" by arranging a private mortgage with me. Are there established reliable brokers who can manage the loan as if it were an arms-length standard mortgage that just happens to use me as the lender? How much work would I personally have to do in the long run? ;-)

I can well afford the up-front loan amount and have good confidence in their financial discipline to pay. Also, I have an excellent accountant who is professionally conservative but used to goofy financial arrangements. Sincerely, Noelie. Austin, TX.

Answer: It isn't a goofy financial arrangement if you have the money and you trust your niece. However, there's the wisdom of the financial ages behind the standard caution of don't lend substantial sums of money to family members. It can lead to a lot of heartbreak.

That said, if you're still determined to go ahead with the loan, it's easy to do. There's no need to work with an outside broker. Instead, hire a knowledgeable real estate lawyer to both draw up a legally binding loan contract, and to make sure that the title and other ownership issues are dealt with properly. Charge your niece a market rate of interest on the mortgage (so you don't get into any trouble with the IRS). Have her set up automatic monthly payment from her checking account into yours. The home is your collateral if she ever stops making payments. Good luck.

07/02/08 by Chris Farrell

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