Think twice before paying off mortgage

This was originally published on Monday, May 30 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: My husband and I purchased our first home 10 years ago. During this time my husband and I have been fortunate enough to advance in our careers and are making more than what we were when we bought our house. When we purchased our home, mortgage rates were much higher that what they are now. My husband and I want to take advantage of our current situation and are considering paying off our mortgage early. Can you help us decide if paying off our mortgage is beneficial?

A: A mortgage is a huge investment that takes a lot of dedication, especially if you purchased your home on a thirty-year plan. Whether you have a shorter fifteen year or a longer thirty-year plan, much can happen between now and paying off your mortgage. Like any large decision, you should weigh the pros and cons and consider where you are in life. Although it may be tempting to live mortgage free, you should consider your other financial goals and your tax situation.

Here are some reasons that you may want to hold off on paying your mortgage early.

  • Other debt: If you have other loans or credit cards that charge a higher interest rate than your mortgage, you should consider paying those off first. Interest on debt other than a mortgage is not tax deductible.
  • Maximize retirement: If you aren’t already maximizing your retirement contributions, use the money you would use to pay off your mortgage to increase your contributions. Do this especially if your employer matches a portion of your contributions. If you are close to retiring or if you started your plan later in life, you should take advantage of getting the most out of your plan. Also, your contributions are tax deferred.
  • Emergency fund: Do you have enough money saved up for a rainy day? If not, create an emergency fund. Most experts suggest to save up at least three months of your current income. You do not want to pay off your mortgage only to put your house up for collateral when an unforeseen event happens.
  • Life insurance: Do you currently have life insurance? If so, is it enough coverage to keep your family from undergoing financial hardships when you pass, especially if you are the primary bread winner.
  • Interest deduction. Paying a mortgage has its benefits when it comes to your income taxes. You receive a tax break based on the amount of interest you pay on your mortgage. If you are in the 25-percent tax bracket and you paid $24,000 in mortgage interest this year, you will be giving up a $6,000 tax break if you pay off your mortgage.
  • Limited liquidity. We all know that selling a home is a long process. If you decide to move or have a medical emergency you may want to have liquid assets, or money, that is easily available to you. You could take the excess money you would use to pay your mortgage and put it in a liquid investment. You can still make money on your investments and still be able to liquidate them much easier than you would a house.
  • Saving habits: If you choose to pay off a mortgage early, what would you do with the money you would have used to pay your monthly mortgage? If you don’t invest or save it, and just spend it, you are not benefiting yourself financially.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

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There’s more than one type of reverse mortgage

This was originally published on Monday, March 31, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Last week, I answered a question I received on reverse mortgages. This week I want to discuss the types of reverse mortgages and what family members need to know.

There are three types of reverse mortgages:

• Federally insured reverse mortgages — This mortgage is backed by the U.S. Department of Housing and Urban Development (HUD) and is known as Home Equity Conversion Mortgages (HECMs). For more information, go tohttp://portal.hud.gov/hudportal/HUD. It provides a bigger loan advance at a lower cost than a proprietary loan. A HECM lets you choose several payment plans and lets you change the payment plan for a minimal fee.

• Single-purpose reverse mortgage — These are offered by state or local government agencies and nonprofit organizations. These are not available everywhere and are usually used for one purpose as defined by the government or nonprofit lender. That purpose may be for home repairs or improvements. This usually is the least expensive option.

• Proprietary reverse mortgages — These are private loans that are backed by private loaning companies. These usually have higher upfront costs.

All three types of reverse mortgages depend on several factors such as your age, the appraised value of your home, and current interest rates, just to name a few.

Family members and those who are heirs to an estate should be aware of what their parents or benefactors are getting into. The bank does not own the property. The title to the home remains with the borrower. If the borrower dies, you have the option to pay off the reverse mortgage. If your heirs cannot pay off the mortgage, the house becomes property of the lending institution; which will most likely sell it to recoup the cost of the mortgage.

Because there are no monthly payments, the interest and the balance grow each month. Unlike a traditional loan where the balance gets smaller every month, the balance actually gets larger. This is because a payment is added each month along with the interest and principal. A smaller reverse mortgage when you are older is advised if you really need the money. If your heirs want to keep the home in the family, take out only what can be repaid. If you plan on leaving an estate and your heirs cannot make pay off the reverse mortgage, the money may be taken from the estate. This leaves a smaller estate or completely depletes the estate.

If the borrower cannot pay the insurance and property tax, the reverse mortgage can be deemed in default and foreclosed.

If you are no longer able to stay in your home, say for medical reasons or need assistance and you have to move to a nursing home or long-term care facility, you will start repaying the reverse mortgage a year after you leave your home. This can come at a time when money is tightest because you have to pay for your care. This can put a strain on you and your family, especially since you may have little to no equity left on the home.

It is imperative that you discuss this with your family or heirs before taking out a reverse mortgage. Carefully think through the situation; a reverse mortgage may sound promising upfront, but you could be selling your future or putting a strain on your family.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

A second mortgage has both pros and cons

This was originally published on Monday,March 17, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

A second mortgage can be an option to paying large bills or expenses.

Because you are putting your house up for collateral, the stakes are even higher than a traditional loan. If you are considering borrowing from the available equity on your home, you may want to consider the pros and cons of a second mortgage.

Pros

• The money from your second mortgage can be used on anything and is not limited like a personal loan or even credit cards. It can be used for home improvements, college tuition or even a vacation.

• The interest you pay on your second mortgage is usually tax deductible, unlike that from a credit card.

• A second mortgage usually carries a higher interest rate than your original mortgage but can be lower than rates on a personal loan and certainly lower than rates on a credit card.

• If you take out a second mortgage, you leave your original mortgage alone. You have access to a large sum of quick cash if you use a second mortgage.

Cons

• The most important and risky aspect of a second mortgage is losing your home.

• If you default on your mortgages, your other assets may be used to pay off the deficit of the second loan.

• Banks are being more selective; people with average credit scores are being denied or offered a higher interest rate. Most banks look for a score of 720 or higher.

• A second loan will add more debt to your home. It could mean that it will take longer for you to be able to own your home free and clear of any debt. The longer you extend your payments, the more your house will cost over the life of the loans.

• You may be borrowing more than you what you actually need.

• If the real estate market dips and your home depreciates in value, you may be owing more than your house is worth.

• Fees and lots of paperwork, comparable to the when you applied for your original mortgage.

Banks are not only the institutions that can offer a second mortgage.

Talk to your lending institution first, the history you have may reduce some of the fees.

Ask friends or family who have taken out a second mortgage about lending institutions they have used.

Talk with banks, credit unions, mortgage companies or a lending institution. It is important to shop around to get the best interest rates.

Understand the terms and don’t be afraid to ask questions. If you are unsure if you want to take equity out on your home or that a second mortgage is not the right choice for you, talk to your lender about other alternatives; consider refinancing, an unsecured personal loan, or a loan secured by a certificate of deposit.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Second mortgage takes advantage of equity

This was originally published on Monday, March 10, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I recently had some health issues and the medical bills are more than my insurance can cover. I want to take a second mortgage on my home to cover my medical bills. What advice can you give me?

Answer: I am sorry to hear about your health issues and hope that your health is improving. A second mortgage can be a possibility to help pay your medical bills. A second mortgage is another mortgage or lien on your home; you are using your home as collateral to receive an amount of money. If you have paid off the original mortgage and take out another loan, that is not a second mortgage and is considered a primary loan.

A second mortgage loan allows you to access the equity in your home. Equity is the difference between the balance of your loan and the value of your home. For example if your home is valued at $300,000 and your mortgage balance is $200,000, you have $100,000 in home equity. Second mortgages are usually used when you need a large sum of money. Many people use a second mortgage to pay large bills, college tuitions, or purchasing or renovating a home.

The term “second” means that it is a sub loan to your original mortgage. If you cannot pay your mortgages your home will be sold to pay off the original loan. If there is not enough money after the sale to pay your second mortgage, that lender does not get the full amount owed to them. For this reason second mortgages usually have a higher interest rate than your first mortgage.

There are two types of second mortgages:

• Home equity loan. A home equity loan is a second mortgage in which you are given a lump sum of money. You pay the loan back much like you would your first mortgage, in installments over a predetermined period of time. This type of loan is best used when you need all the money up front, usually for a home renovation or incurred medical bills. Home equity loans are usually a fixed rate.

• Home equity line of credit (HELOC) works almost like a credit card. You receive a line of credit that is based on the equity in your home and you can withdraw from it. How much or when you use the credit is up to you. Usually, the line of credit comes with a credit card or checking account, so you have access when you need it. You would use this second mortgage to pay expenses that occur over a period of time, like tuition or ongoing home repairs. HELOC’s usually have adjustable rates. You only pay for the portion of the line of credit that you use. Paying down the balance allows you to replenish your credit limit, similar to a credit card. Be careful if you are taking out a second mortgage to pay off your debts. Unless you change your spending habits, you will find yourself back in the same position and maybe losing your home. Remember that you still have to make your monthly payments on your first mortgage. In other words, you will be making two payments monthly, your original and second mortgages. Before taking out a second mortgage loan, be sure you can afford the extra payment.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Four things to consider before refinancing

This was originally published on Monday, March 3, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I purchased my home at a higher interest rate than what is being offered now. Is it a good idea to refinance my mortgage loan?

Answer: Mortgage interest rates still are at an all-time low and refinancing your mortgage can be a wise choice. Refinancing simply means paying off an existing loan and replacing it with a new one. Some people refinance their loans to take advantage of lower interest rates resulting in lower monthly payments, shorten the term of their loan, convert from/to an adjustable rate or fixed rate, consolidate debt, or to take advantage of the their equity. You can refinance your home, your car or even other loans such as student loans. But before you do, there are a few things to consider:

• Ahead or break-even

Your break-even point is the time it takes to recuperate your costs associated with the refinance. To calculate your break-even point, divide the total costs of the refinance by the monthly savings on the new loan. Your answer will result in the number of months that would be required to recoup the cost. For example, if it costs you $3,000 to refinance and you are saving $125 per month; your break-even point is 24 months, or two years. There are online refinance calculators that can help. There is no magic maximum payback period that makes refinancing worth it. Usually, two to three years to pay back the costs is considered reasonable.

• Cost, fees and penalties

Check with your bank if there are fees associated with refinancing. Refinancing a home incurs many of the same fees you did when taking out the mortgage. In general, you may be charged an application fee, title insurance/search, closing costs, attorney fees, application fee or a penalty for early payment of your current loan. If you purchased points to lower your interest rate, add that cost in as well. Be sure to add all these extra costs when calculating your break-even point. You can roll these costs into your mortgage, but then you will be paying interest on them, which may negate your refinance goals. If you are refinancing with the same lender, ask what fees can be waived.

• Credit score

Before starting the process of refinancing, take a look at your credit score. Your credit score will affect the rates that you will be offered. If you do not qualify for the lowest rates it may not be worth refinancing. A credit score that is above average or high will certainly help. Even if you have a lower credit score, talk to your lender to see what rates they can offer you.

• Time

You need to stay in your home for at least the amount of time you need to break-even. If you are planning on moving and selling your home shortly after refinancing, it may not be worth it. Also, if you have refinanced your home previously, look at the added time it takes to pay off your loan. Each time you refinance, you are starting the clock over again. If you are close to the midpoint of your current loan, you may be increasing the amount of time to pay off your loan. This could mean more interest paid.

The bottom line is refinancing can be a way to save money if done properly. Talk to your bank, shop for the best rates, know your break-even point, and improve your credit score.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Year-end review helps you plan

As we close in on the end of the year, it’s a good time to review the different elements of your finances. A review gives you the opportunity to reward yourself for progress and learn from mistakes, as well as the chance to get started on changes for the upcoming year. Small, systematic changes can be especially rewarding in your personal finances, whether you build up savings over time and or improve your credit score with positive incremental behavior.

Today, we’ll look closely at the option of prepaying your mortgage.

Prepaying your mortgage can save you thousands of dollars in interest and give you full home ownership years ahead of schedule. It can be wonderful to own your home and rid yourself of debt sooner than expected, but there are a few things to consider before taking this step:

Do you have emergency savings? If you don’t have at least three months of emergency savings, use any extra money to build this fund first.

Do you have higher interest debt? If you have credit cards or personal loans, the interest rates on these debts are probably higher than your mortgage interest rate. What’s more, your mortgage interest is deductible if you itemize deductions on your tax return. Focus on paying down higher interest debt first, before you turn to your mortgage.

Are you saving enough for retirement? Earnings in your retirement account compound over time, and the rate of return on your investments may be higher than the effective interest rate for your tax-deductible mortgage interest.

Look first at your current amount of annual retirement saving. Is this on track to get you to the final retirement nest egg that you need? If so, you can choose between using any additional money to build a bigger nest egg, or prepaying your mortgage and saving on interest.

Depending on your choice of investments, you could get more out of your money by squirreling your extra funds away in retirement. But if debt is a heavy psychological burden for you, it may give you more peace of mind to prepay. Run the numbers, think about your attitude toward debt, and make your choice.

Prepaying Your Mortgage

First, call your financial institution or review your mortgage documents to find out if there is a mortgage prepayment penalty. If a penalty exists, find out if it comes with an expiration date.

Next, start playing with some numbers, by using mortgage calculators available online. For instance, Bankrate.com’s Mortage Payment Calculator lets you calculate your savings when you add extra monthly, yearly, or one-time payments to your existing mortgage payments.

Let’s say that you have 20 years and a $150,000 balance remaining on your mortgage, which is fixed at a rate of 6%. By the end of the next 20 years, you will have paid $107,915 in interest, in addition to the principal, according to Bankrate.com

When you add an extra $100 payment each month, you shorten the repayment timetable by 2 years and 11 months, and you save more than $18,000 in interest payments.

To prepay your mortgage, simply add the extra amount that you choose to your monthly mortgage payment, or send an extra mortgage payment at the end of the year to your financial institution.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com

Have mortgage questions ready

As you visit financial institutions about a home loan, it can help to have questions or topics ready to discuss. Such questions will help you learn about the best options for you, and will allow you to compare offers from different lenders side by side.

Which type of mortgage will be right for you? Typically, there are two major types of mortgages: fixed-rate mortgages and adjustable rate mortgages. The specific mortgage you choose will depend on your circumstances. If you plan on staying in your home for the long term, a fixed-rate mortgage may be the better option for you. You don’t risk a rise in interest rates throughout the fifteen or thirty years that you hold the mortgage and your payments will be predictable and straightforward.

With an adjustable rate mortgage (ARM), you can expect the interest rate to change throughout the life of the mortgage. One example of an ARM is a mortgage that starts with a low interest rate, which changes after the initial period of time passes. After that period, the ARM interest rate will be based on a standard financial index, up to a certain set limit, and your overall mortgage payment will change accordingly.

If you look into this option, pay close attention to the maximum interest rate you may pay, as well as the calendar dates where the interest rate will change. If there is a big change in the interest rate, your mortgage payments may suddenly rise, and you need to be sure that your budget can handle the increased payment. An ARM’s low initial interest rate may give you an advantage if you’re not planning on staying in your home for the long term, as long as you carefully consider your budget. Different mortgage types suit different purposes, so be sure to talk to lenders about the best option for you.

Compare interest rates with different lenders. Different financial institutions have different ways of calculating the interest rate they’re going to offer you. Some lenders may weigh certain factors more heavily than others, so there can be some variation in what you’re offered. A fraction of a percentage point can make an enormous difference in the amount you pay over a 30-year mortgage.

Will you pay points? Points allow you to reduce your interest rate. You pay a certain amount at closing (one point is calculated as one percent of your mortgage) in exchange for a reduction in your interest rate.

If you are offered points with you interest rate, talk to your loan officer about breaking down those numbers into the specific amounts you would pay at closing and on your mortgage payments. You can also find calculators online that will help you do this. Dollar amounts will help you compare offers from different financial institutions.

Compare closing costs. Different lenders may offer different closing costs, so it can help you to see estimated closing costs from various financial institutions before you make your final decision.

Closing costs include loan origination fees, application fees, appraisal and inspection fees, as well as other insurance and settlement costs. You can talk to lenders to develop a good understanding of each of these costs, and compare them as a factor in your decision.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com.