As if the financial markets haven’t been in enough turmoil lately, one of the world’s largest banks, Lehman Brother, filed for Chapter 11 bankruptcy early this morning. Lehman Brothers has been a player in the financial sector since its founding in 1850 and this news has opened some eyes to the severity of the nation’s current financial situation.

U.S. Treasury Secretary Henry Paulson made a push to save the huge firm by requesting that some of the nation’s top banks invest $35 billion into a deal that could potentially save Lehman. However, U.S. legislators were unwilling to use taxpayer money to bail out the investment bank.

Potential buyers Barclays and Bank of America were both considering deals that would rescue Lehman, but pulled out due to the government’s lack of funding.

In spite of the bank’s $600 billion of assets, stock prices plummeted Friday by nearly 97%, leaving Lehman with a valuation of about $3 billion.

Shortly after Lehman’s bankruptcy announcement, Bank of America announced it would pay $29 per share, a total of $50 billion, to purchase Merril Lynch & Co., another large investment bank struggling in the turmoil of the financial markets.

According to a statement from Bank of America Chairman Ken Lewis about his companies buyout of Merril Lynch, “Together, our companies are more valuable because of the synergies in our businesses.”

Popularity: 60% [?]

It’s been quite a week. Financial stocks were in the spotlight on Wall Street over fears that Fannie Mae and Freddie Mac could be in trouble, and whether the government will step in and take control if troubles continue. Stocks for the two mortgage giants met their lowest lows in 15 years this week.

The government is looking at what it could and/or should do if Fannie and Freddie are so pressed that they cannot raise capital to continue operating.

This week brought more job cuts in the financial arena when Indie Mac announced that it would stop taking loan applicatioins and slash it’s workforce from the current 7,200 to around 3,400 jobs.

Fed Chair Ben Bernanke announced a list of sweeping measures, which would help to shore up mortgage lending and help markets run more smoothly. They could extend the feds role in lending to the nation’s largest investment banks and enhance central bank authority over key aspects of the financial system.

National Association of Realtor’s Pending Home sales Index showed an almost 5% drop in home sales for may.

That does it for this week’s wrap up.

Popularity: 45% [?]

According to the Micro Market Report, a local report published by Teles Properties in Beverly Hills, real estate sales are on the rise in the posh locale. The report suggests first-time home buyers are back in the market, pushing the median sale price up from $1.475 million in March 2008 to $1.74 million in April. That April figure is also up from $1.54 million from April 2007, which suggests the market in that area may finally be taking a turn for the better.

Unfortunately, not all areas covered in the report are experiencing such promising numbers. While month-to-month sales volume tripled in the Venice area from March to April of this year, median sale prices in the Wilshire and Silver Lake – Echo Park areas were down $87,500 and $52,500 respectively. Of course, this could all be chalked up to the location. Well-known, high-end areas like Beverly Hills are always in demand, and with the struggling dollar and strong Euro, 90210 has become a particularly attractive zip code to foreign buyers.

Nonetheless, new construction in the area has slowed and lenders are still more stringent than ever in their qualification requirements.

Could prospering markets in certain areas of Beverly Hills be a sign of things to come for the rest of the real estate market? Possibly, but it may be too early to say for sure.

Popularity: 44% [?]

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Popularity: 31% [?]

If you’re already subscribed to our RSS feed, you’ve no doubt noticed that we publish mortgage-related news headlines twice daily to the news feed, and these headlines can’t be found anywhere on the site. You may have wondered why that is. Well, the headlines are aggregated from several sources around the web (more to come), and they’re really in beta testing right now. We’re working on a way to aggregate news headlines from across the net in a way that could really be beneficial to our readers. Our new site design, which I’m formally announcing is under works, is going to let us aggregate news, videos, and other information from around the net, as well as our articles, interest rates, the works. It’s really going to provide a mortgage/financial dashboard right on the homepage for everyone looking to get an update on the important information.

We’ve been running news headlines in our RSS feed for several months now and have had quite a few people say they’ve enjoyed having that feature (if you don’t enjoy it, speak now via our contact form, or forever hold your peace). So, if you’ve been wanting to keep up to date with current mortgage news, updated twice daily, now is the time to subscribe to our news feed, where we publish our articles, as well as twice daily mortgage news headlines. Our new site launch is going to really improve on that with more sources, videos, and sound bytes.

So go for it. Free mortgage news headlines updated twice a day just by subscribing to our RSS Feed. You can subscribe now by clicking here.

If you don’t know what RSS is and would like some more information about it, you can read more over at WhatIsRSS.Com.

So, now that I let the cat out of the bag about our new site in the works, I guess we really have to get moving on it . Anyway, thanks to all of our subscribers for putting your trust in Truthful Lending dot Com to give you another perspective on the mortgage, real estate, and financial industries, we certainly hope we’ve lived up to your expectations so far. And thank all of you who put up with that survey feature we tested for a week or so recently…we got some great feedback and you can bet that a lot of those suggestions will be going into the new site, so we really do appreciate your time to those who took a moment and completed that survey.

Popularity: 25% [?]

The difference between marginal and average tax rates is a fairly important concept for all tax payers to better understand the way the government gets paid. You’ve probably heard both terms, but maybe never knew what they were. Well, let’s fix that. Click to continue →

Popularity: 54% [?]

Since the subprime mess rocked the mortgage world early this year, the government has authorized the quasi-governmental agencies, Fannie Mae and Freddie Mac, to lessen their qualification requirements and allow more homeowners to refinance into conforming loans. In doing so, these agencies have taken on a greater risk in an effort to alleviate some of the pressure on the market. According to a recent report published by Standard & Poors, these “Government Sponsored Entities pose a greater fiscal risk than brokers^1.”

According to S&P, the government will let Fannie Mae and Freddie Mac “replace some of the lost credit from private-label mortgage packagers,” many of which disappeared along with the subprime mortgage market. But the moves “increase both the likelihood of government support and the potential cost of providing such support.¹”

According to an S&P analyst, the recent policy decisions aimed at supporting the U.S. mortgage market have made GSEs commitment even larger than before. If these commitments turn into government debt, it could actually damage the United States’ AAA credit rating.

GSEs Take on Greater Liability

At the end of last year, GSEs and related enterprises held a total of $7.3 trillion in debt, representing over half of the U.S. economy. According to Forbes.com, GSEs had 80% of mortgage-backed securities in January of 2008, a huge increase over the 46% of the second quarter 2007. According to Fannie Mae’s January 2008 monthly summary, their portfolio cap of just under $800 million, although the highest it’s ever been, will be removed completely in March 2008.³

Forbes.com also reports that the Federal Housing Administration is pushing for changes that would increase the governments role in housing even further². According to the same report from Standard & Poors, “financial cost to the government of maintaining aggregate financial system stability during a deep and prolonged recession could be even more substantial, possibly adding as much as 25% of gross domestic product to government debt.¹”

Sources:

1. Fannie Mae’s And Freddie Macs Liquidity Role In The U.S. Mortgage Markets Faces Uncharted Waters – Standard & Poors
2. Bailout Now, Pay Later – Forbes.com
3. Fannie Mae January 2008 Monthly Summary – Fanniemae.com
   

Popularity: 18% [?]

This site is run off the popular content management system/blogging platform, Wordpress. Thanks to John Crenshaw’s amazing skills with the software for porting it into a real article database (if you know what Wordpress is, you’d have no idea this site was run using that software). While he may be good at coding websites, I have to come clean…our database didn’t crash…John deleted it…by accident.

Now, I didn’t crash the database, nor did I restore it, but what I did do is learn quite a bit in the past few hours about restoring a website back to the way it was so I thought I’d share a bit about what happened, how it happened, and how we fixed it, in case it happens to any of you.

In addition to running Truthful Lending dot Com, John runs a web design and search engine marketing company called Mirage Design Works. He was doing a bit of tweaking with a site he was working on and, being the suave web designer he thinks he is, deleted a database, ignored the confirmation message, only to realize he deleted the database for this site. It’s ok John, stuff happens, right? Anyway, the way the database was deleted, it couldn’t be recovered and, since John’s been busy setting up automatic backups for this site, he, apparently deleted the most recent backup files as well during the setup. Well, auto backup was all set to run when John deleted the database and CRASH!!, no more Truthful Lending dot Com (if you stopped by in the past several hours you’d have seen the result).

Anyway, here’s how he fixed it. And thanks to John for teaching me this in case I ever do something so dumb Just kidding!.

First, he restored the database with an older backup he made on 2/11/08. Well, we’ve had a few more articles and news stories added since then, so that didn’t do the full job. Since the other, more recent backups were deleted, he jumped on archive.org to find some older copies of the site that he could copy the newer articles from and repost them. Alas, archive.org only has this site cached up to April of 2007, so that didn’t work.

Then, he searched Google using this query…

site:truthfullending.com

In case you don’t know, that will bring up all the pages Google has saved for truthfullending.com. He had to customize the query with Google’s advanced search features to only find sites indexed since the last backup (a little over two months ago). He found all the most recent articles that weren’t in the older backup and copied the content and reposted them. He used Google’s cache feature to pull up older copies of the articles. Whenever you search Google, the pages that come up in the results will have a link near the bottom that says “Cached;” if you click on that it will pull up a copy of the page that Google has saved on their own system from the last time they visited the site. So, even though the site was down, John was able to view the copies of the pages that Google has saved on their servers, copy the article content, and repost it here.

Well, I imagine if John hadn’t gotten that taken care of I’d be spending my weekend rewriting articles…thanks for saving me that one John!

Anyway, if you notice some older articles posted as if they are new ones, this is the reason.

Popularity: 21% [?]

In accordance with the Economic Stimulus Package signed into law earlier this year, conforming mortgage loan limits have increased in many areas around the country. According to Fannie Mae, these increases are by county and will not affect all counties in the U.S.¹

The measure is designed to ease the troubled housing market and the economy as a whole, so there are certain restrictions. First of all, Fannie Mae will only purchase the new jumbo-conforming secured by one-unit properties only. Also, these increases are only temporary and will remain in place until 12/31/2008.

You can find out if you’re county is affected by these new conforming loan limits with this chart (Warning: Big File, Be Patient).

Chart of Historical Jumbo Conforming Loan Limits

Click to enlarge

I also found this pdf called the Home Stay Initiative released by Fannie Mae. It explains some of the things Fannie Mae is doing to relieve the current mortgage crisis.

Sources:

1. Fannie Mae Media Statement, March 6, 2008

Popularity: 34% [?]

Back in the heyday of the mortgage market when shady brokers were selling their socks off (which really wasn’t long ago now), they used the terms “soft” and “hard” credit inquiries when talking about pulling borrower’s credit scores. In fact, confusion about the difference between these types of inquiries was an easy thing for shady brokers to take advantage of. So, let’s dive into the different types of credit inquiries and how they affect your credit score.

Soft Vs Hard Inquiries

The terms “soft” and “hard” when referring to credit inquiry types aren’t exactly technical terms; instead, they’re industry jargon used to refer to two groupings of credit inquiries. Credit inquiries that do not show an intent to borrow money are not supposed to hurt your credit score. Account status checks by your current lenders and banks, pre-qualification credit checks for the purpose of sending credit card offers, and personal inquiries made by you through one of the many credit reporting agencies or credit monitoring services are all included in this category; industry jargon deems these credit inquiries “Soft” credit pulls.

“Hard” credit inquiries are those inquiries that do represent an intent to borrow money and will damage your credit score, if only slightly. We’ve covered the reasoning behind this in other articles about why credit inquiries affect your credit score in the past, but to put things into as simple terms possible, the day you decide to borrow more money, all else being equal, you become a greater credit risk. The reason for this is simple, the more money a person borrows, the more difficult it becomes to repay that money. So, by lowering your credit score just a bit each time you show intent to borrow money, the credit agencies are sort of, preemptively adjusting your credit score.

Can You Qualify for a Mortgage Using a Soft Inquiry?

Yes and No. Let’s rephrase that question. Can you get a true mortgage offer, Good Faith Estimate and all, using a soft credit inquiry? No. That said, I have given rough quotes based on soft inquiries before, and that’s perfectly ok, the problem with that in this day and age is, until you have an estimated settlement statement in front of you, you really don’t know what you’re getting or if the mortgage professional on the other end of the phone is being honest at all.

What About The Broker That Said He Uses “Soft Pulls” to Pre-Qualify Me?

Baloney. Mortgage companies don’t use soft pulls to protect your credit. If you give a company your social security number to prequalify you for a mortgage, they are going to run your credit and it’s going to be a hard pull. I’ve personally heard this line used before in an attempt to convince a borrower to fork over his or her social security number, but it’s absolute nonsense.

So How Can You Get a Quote With a Soft Pulled Credit Report?

You can get a preliminary quote with a credit report you pulled yourself. While a lot of the mortgage salesmen/women are taught to not give quotes before they have a real credit report, that’s really just a sales tactic; if you find an honest mortgage professional, he or she will give you a rough quote based on a credit report you pulled yourself.

How To Pull Your Own Credit Report

There are a few different resources where you can do this. All consumers are entitled to one free credit report per year, if you haven’t gotten a credit report in the past year, you can get one free at AnnualCreditReport.Com. If you’ve already pulled your one free credit report and would like to check it again, you can go to FreeCreditReport.Com. Now, here’s a little tip to help you out on this one. FreeCreditReport.Com gives you a free credit report as well as a 7-day free trial for their Triple Advantage Credit protection program. Now, this is a great program if you need credit monitoring, but if not, you can cancel within the 7 days and you keep your credit report for free. The only other option to getting a copy of your credit report is to buy one for $13-30 online, but why do that when you can get it free? A lot of companies try to make it nearly impossible to cancel the free trial so that you end up paying anyway, but FreeCreditReport.Com is run by Experian, one of the 3 major credit reporting agencies and is very legit. I’ve personally pulled my credit report there and canceled within the 7 days and it was no hassle at all. No cost to me whatsoever and I got a copy of my credit report.

Once you get your credit report, seek out an honest mortgage professional, and he or she should be more than happy to give you an idea what terms you could qualify for based on your free credit report.

Popularity: 35% [?]

Washington Mutual made the decision yesterday to shut down operation of it’s wholesale lending arm as well as close the doors on all of its standalone home loan centers according to a WAMU spokeswoman¹.

WAMU and the Subprime Market

WAMU made what now seems like a pretty bad decision several years ago to enter the subprime mortgage market. The 119-year old company is really feeling the squeeze now as a result of that decision and so are it’s share holders, who have lost 79% of the value of their investment in the company.

Capital Injection

WAMU also announced yesterday that it would close a deal to accept a $7 billion dollar capital injection investment from Private Equity Firm, TGP; which, although it could serve to give WAMU the boost it needs, may further dilute shareholder’s value in the company.

Although it isn’t immediately clear when the standalone mortgage centers will be closing, an internal memo obtained by Businessweek puts the limit for brokered mortgage transactions at June 13. There’s a rumor over at the Mortgage Lender Implode-O-Meter that shutting down wholesale operations was a condition of the TGP investment, although we’ve been unable to confirm that.

Retail Operations

WAMU plans to continue it’s retail home loan operation within the doors of it’s banking center locations. WAMU opened doors all the way back in 1889 and entered the home loan business only a year later. WAMU has grown exponentially since then, becoming the second largest home loan lender in the United States, after Countrywide. In 1999, WAMU acquired subprime mortgage company, Long Beach Mortgage, which unwittingly exposed WAMU to the brunt of the mortgage crisis that would arrive less than a decade later.

Sources:

1. CNN Money
2. Business Week
3. Wall Street Journal
4. Mortgage Lender Implode-O-Meter
5. Washington Mutual

Popularity: 18% [?]

A recent accounting error resulted in my checking account being overdrawn by $250 and me being charged $245 in overdraft fees as a result. Here’s why.

Large to Small Transaction Processing

Many banks these days, in an effort to extract as much money as humanly possible from their customers, have begun processing checking account transactions in order of largest to smallest. This is why I ended up being charged $245 in overdraft fees for what should have amounted to one overdrawn transaction.

In my case, several transactions cleared on the “big fee day” as I refer to it now. At the time I had about $1500 in that particular account. The largest transaction to clear that day was a check I wrote of $1,400. There were 8 other transactions to go through that day, the total of all of these adding up to $350. One of these transactions was a car payment of about $300; the remaining $50 in transactions were small purchases like a pack of gum, a Starbucks stop, etc.

So, had my bank processed my transactions in order of smallest to largest, the $350 in smaller transactions would have cleared just fine and I would have only been popped with one overdraft charge. Instead, they cleared the $1,400 check first, then the $300 car payment overdrew my account, resulting in the first $35 charge, followed immediately thereafter by 6 more small transactions and six more overdraft charges of $35 each!

Just because of the way the bank chose to process my transactions I paid seven overdraft charges totaling $245. Had the bank processed the transactions in the reverse order, the first seven transactions would have cleared just fine, with the $1,400 check being the only overdraft.

So, $245 vs. $35 just because of the way the bank chooses to process transactions? That’s a scam if I ever heard one. And don’t think the bank has any excuse for this either…trust me, I asked.

Bank’s Excuse #1

When I called to object to such a ridiculous system I was told that the bank did a study and the customers prefer to have transactions processed from largest to smallest. When I asked why or for any information at all about that study, the customer service rep didn’t have an answer, neither did her supervisor, and apparently nobody does because they told me they’d have someone to call and follow up with me…no one ever called.

Bank’s Excuse #2

When I pushed a bit more, I was told that processing transactions from largest to smallest ensures that the important bills get paid…the bank is assuming your most important bills are probably the largest. Ok, fair answer at first glance, but wait…every single one of my transactions were paid, including the $1,400 check that overdrew my account. When I brought this up, the supervisor said, “well, sometimes they won’t all get paid.” When pushed, she had no real answer to when those “sometimes” were.

Bank’s Excuse #3

After about 20 minutes on the phone and a handful of questions but no answers, I requested that the order of my transaction processing be changed. No can do, I was told, apparently the bank does not have the ability to change the order of the transactions.

So It All Boils Down to This…

Ok, so let’s make sure I’m clear on this.

1. Transactions are processed in a way that will always result in the most fees for the bank.
2. Someone, at one point in time, studied some customers and found that they wanted their transactions processed from largest to smallest, but the actual location or means by which someone can get a copy of this study is completely unknown.
3. The bank processes transactions from largest to smallest to ensure that the largest, and presumably, most important payments actually clear, but all transactions cleared so that doesn’t make any sense.
4. The bank is incapable of changing the order of transaction processing for its customers and they have no idea why that is.

Ok, I think I’ve got it now. By the way, the bank was Fifth Third.

Popularity: 64% [?]

Most Americans have a strong desire to pay off their homes. In a country wallowing in debt up to its eyeballs, getting the biggest debt you’ll likely ever take on paid off can be a pretty exciting idea. Believe it or not, people haven’t always been so eager to pay off their mortgages; it’s certainly not a new trend, but it helps to understand the reason the idea of owning your home free and clear is so popular these days.

Now, you’re probably thinking, “why understand the reasoning behind paying off your mortgage, its simple, to reduce your debt, pay less interest, and be safe from the potential of losing your home if you lose your job.” Well, it seems simple, but in many cases, the numbers work out in favor of not paying off your mortgage. How can we explain, then, the overwhelming support in favor of paying off a mortgage that may actually be helping most homeowners in the first place? To do that, we need to understand the reasons behind the wave of excitement over becoming mortgage free as well as the numbers that show whether or not becoming mortgage free is something that will benefit you.

Why Pay Off Your Mortgage?

For most Americans, there are three main reasons for paying off their mortgages:

1. A mortgage is a debt, and debts are risky by nature.
2. A mortgage is an expense, and paying off your mortgage cuts out a large monthly expense.
3. Because of the length of time it takes to pay off a mortgage, most homeowners will pay an enormous amount of interest over the life of their loans.

Let’s examine these one at a time…

A Mortgage is a Debt, and Debts are Risky by Nature

The Two Major Risks Associated with Mortgages:

1. If some major negative financial event occurs in your life, such as a job loss or major illness, you run the risk of being unable to make your mortgage payments and the bank could foreclose on the property.
2. For borrowers with interest rates that may adjust during the life of the loan, when caught in a real estate market downturn, you run the risk of not being able to refinance if your home’s value, and hence available equity, drops significantly. If your interest rate adjusts to a point that you cannot afford to make payments without refinancing, you may have to sell or the bank will foreclose on the property.

A Mortgage is Expensive, So Paying Off Your Mortgage Cuts Out a Large Monthly Expense

This is pretty simple, the more money you have, the more freedom you have to do what you want. For most Americans, paying off their mortgages will relieve them of their largest monthly expense, giving them more freedom to do what they want.

Also, income generally drops at retirement when workers begin living off pensions, social security, savings, etc. Having the mortgage expense eliminated by that time frees up a large expense.

Mortgage Interest Is Expensive

Since the term of a mortgage is generally around 30 years or more, you can expect to pay an enormous amount of interest over that time. In fact, on a $200,000 mortgage, at 6%, over 30 years you’ll pay over $231,000 in interest…more than the property even cost to begin with!¹

Getting that mortgage paid off quickly certainly helps save interest. Even as little as $100 extra per month in the above example would save almost $50,000¹.

Why Not Pay Off Your Mortgage?

Now let’s reexamine the reasons why homeowners want to pay off their mortgages and see why you may not want to pay it off.

Debt Allows You to Leverage Other People’s Money

Debt always carries some risk with it, but debt is the only way to leverage the often-talked-about principal of “Other People’s Money.” If you have $100,000 in cash to invest, at 6% per year you’ll reap $6,000 in gains. Now, if you have $100,000 cash to invest and you add to that $100,000 of someone else’s money in the form of debt, you can reap $12,000 in gains the first year with the same $100,000 of your own money. By taking on debt, in this case, you double your cash on cash return from 6% to 12%. As long as you’re paying less interest on the money borrowed than you’re making from the investment, you come out ahead.

Bank Make Money with Arbitrage, and So Can You

Arbitrage, with regard to mortgages and investments, is a concept that refers to borrowing money at a lower rate than you can make from it through investment. For example, if I can borrow money at 6% and invest it at 8%, I have a 2% positive gain on that money. If my $200,000 mortgage at 6% costs $1,199 per month, and, instead of making an extra $100 payment each month on the mortgage, I invest that $100 at 8%, I can gain $8 per month, as opposed to the $6 per month I would save by applying that money to my mortgage at 6%.

Mortgage Interest is Expensive, But You Have to Consider the Bottom Line

Sure, making an extra principal payment of $100 per month in the above example would save $50,000 in interest charges over the life of the loan, but by investing that extra $100 per month at 8% for those same 30 years, I can make almost $150,000. That would give me enough to pay the extra $50,000 in interest on the mortgage and still have almost $100,000 left over.²

Mortgage Ideas to Consider Beforehand

Opportunity Cost

Whether or not you should pay off your mortgage depends on a number of factors, and you really have to do the math to find out if it’s in your best interest. When considering the options, always keep in mind a key term…Opportunity Cost.

Opportunity Cost is defined by Investopedia.com as:

“The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.”

And…

“The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment – say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% – 2%).”

Whatever you do with your money, there is always an opportunity cost. Instead of spending $5 a day no a Starbucks latte, you could just invest that $5 a day. $5 a day at 8% over 30 years is around $225,000. So, you could say the opportunity cost of 30 years-worth of daily Starbucks lattes is $225,000, even though, over those 30 years you’d actually spend only $54,000 at Starbucks. Over 30 years you could spend $54,000 at Starbucks and have nothing to show for it, or you could spend that same $54,000 over 30 years on an investment and have $225,000 to show for it. That’s opportunity cost.

So, before you decide to pay off your mortgage, you need to calculate the opportunity cost of doing so. Find out what else you could do with the money you’d put toward paying off your mortgage and run the numbers.

Acceptable Risk

A large portion of your decision for or against paying off your mortgage will lie in the level of risk you personally find acceptable. Here are some of the risks you should consider…

The Type of Mortgage

If you’re on a 30 year fixed rate mortgage and are debating whether or not you should put extra money toward payoff, or invest, this won’t be a factor for you….either way, your mortgage rate and payment are going to be fixed for the life of the loan.

If, however, you’re on any type of loan without a fixed interest rate, you need to consider the fact that your interest rate will fluctuate. The calculations can get pretty complex at this point, but a simple technique you can use is to run the numbers 3 times. The first run, assume your interest will pretty much stay the same. For the second calculation, assume the interest rate will hit its cap (most adjustable rate mortgages have an interest rate cap); this is your worst-case scenario. Finally, run the numbers assuming the interest rate will hit its floor (most adjustable rate mortgages also have an interest rate floor); this is your best case scenario.
Now, if you want the numbers to be really accurate, you need to factor in any projected refinance costs. For example, if you’re on a 30-year fixed, interest-only mortgage, and plan to make interest only payments and invest the difference, keep in mind that the interest-only feature on most of those mortgages are only available for 10-15 years, after which point you have to start making principal and interest payments; in other words, the payment will go up significantly if you don’t refinance. So you’ll need to factor the cost of refinancing every 10-15 years into your calculations.

Investment Options

You should also consider the investment options available to you and their associated risks. In the examples above I used 8% for the investment rate. A question you need to answer is, can you even find an 8% investment, and if you do, can you realistically expect that return to at least remain stable over the life of the investment? For example, the S&P 500 has averaged just over a 9% gain per year over the past 30 years, so 8% is certainly a reasonable estimate of what you could expect, but some people lose money investing, and others make quite a bit more than 8%; it all depends on your knowledge, experience, ability, etc. Only you can make the call as to whether or not you can pull investment returns that will outweigh your mortgage costs.

Market Conditions

Real Estate is, always has been, and always will be a highly cyclical industry; meaning there are a lot of ups and downs and those ups and downs are more pronounced than other industries. You need to have an understanding of your own personal understanding of the Real Estate market. Will you be able to see a bear market before it arrives? During a bear market, will you be able to recognize when the market’s bottomed out? And during a bull market, will you be able to recognize when it’s reached its peak? You don’t have to be Warren Buffet to recognize these things, especially since markets don’t usually turn on a dime. If you keep your eyes and ears open and you’ve provided yourself enough of a safety margin, you should be able to prevent major market swings from damaging your plan.

On the other hand, you need to be able to recognize when this is completely outside of your ability. Only you know yourself well enough to make the call. If you don’t think you can predict market conditions before they have a major impact on your plan, increase your safety margin. You can do this any number of ways, one of the best is to ensure you always have some equity in the property. It’s much more risky to hold a 95% LTV mortgage than one at 60% LTV. Your ability and knowledge of Real Estate and market trends will determine how much of a down payment, in this case, you’d need to make in order to lessen your risk to an acceptable level.

Methods to Pay Off Your Mortgage

So now that you’ve gotten this far and you’re still thinking about paying off your mortgage, here are some of the most common ways to make that happen.

Bi-Weekly Payments

Our bi-weekly payment calculator can show you the benefits of a bi-weekly payment plan. On a bi-weekly payment plan, instead of making one payment per month, you make two. The amount of your monthly payments don’t change, instead, the benefit lies in the fact that making 12 monthly payments of $1,000 totals $12,000 a year, whereas making bi-weekly payments of $500 means that you’ll make 26 payments of $500 each year, which totals $13,000.
The reason for the difference lies in the fact that there are 52 weeks per year and 12 months per year. Bi-weekly payments will have you making 26 payments per year, and monthly payments will have you making 12 payments per year. Since bi-weekly payments are half what monthly payments would be on the same mortgage, you end up making the equivalent of one extra monthly payment each year on a bi-weekly plan.

Extra Payments

You may not want to commit to a bi-weekly plan, so instead you can opt to make extra payments whenever you have some extra cash. Our Loan Length Calculator can show you the effect of making extra payments on your mortgage.

Mortgage Terms Less than 30 Years

By far the most common fixed-rate mortgage term is 30 years, but you can opt for a 10, 15, or 20 year fixed rate mortgage. Our mortgage payment calculator can show you the difference in payment amounts with various term lengths.

Mortgage Acceleration Plans

Mortgage acceleration plans are becoming more and more popular these days. One such plan is called the Money Merge Account. We won’t go into the details of these plans here, but many people find them useful. Before looking into them, you should know that there is some debate over whether they are truly beneficial to homeowners, but we’ll leave that up to you to decide.

Investment as a Means to Paying Off Your Mortgage

You should also know that there is a middle ground between paying off your mortgage and investing your extra cash; you can do a combination of the two. If you’re keen on the idea of being mortgage free, instead of making extra principal payments, you can invest that extra cash until it reaches a certain amount, at which point you can either pay off a chunk of your mortgage with the investment proceeds and do it again, or simply wait until the amount in your investment account(s) equals your mortgage amount and pay it off entirely. Obviously, the same investment risks described above are a factor in this option, but it is commonly used as a method to early mortgage payoff.

Conclusion

Ultimately, it is quite possible to build wealth without ever paying off your mortgage. If you chose to not pay off your mortgage, you can certainly have more money in the long run. However, the decision should be examined carefully using all of the information we’ve gone over in this article. If your main goal is to eliminate risk, or come as close as possible to eliminate risk, you’ll want to pay off your mortgage as fast as you can. On the other hand, if you’re someone that can accept a level of risk, no matter how small, investment alternatives should be looked at and your personal level of acceptable risk should be factored in.
Our mortgage and financial calculator section has some great calculators that can help you on your way to calculating what’s best for you.

Sources:

1. Calculated using the Free Debt Calculator
2. Based on $0 starting balance, compounded monthly

Popularity: 75% [?]

I was doing a quick search for a website someone told me about a while back because I couldn’t remember the URL. The site is the Mortgage Lender Implode-O-Meter and, for those who haven’t seen it, it tracks the mortgage companies that have gone under since, according to the website, late 2006.

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Popularity: 28% [?]

With all the turmoil in the mortgage industry these days, a number of our readers have been wondering what happens if their mortgage lenders go belly up. Will the terms of your loan change? Will you have to renegotiate the loan with another lender? Well, most of what goes on in the secondary mortgage market is a mystery to most homeowners. Usually that’s fine, because you probably don’t care who holds the loan, as long as it doesn’t affect the terms you agreed upon in the first place. Well, since lenders have been dropping like flies lately, it’s pretty understandable to be a bit worried, or at least wonder what’s going to happen if your lender takes a nose dive, so let’s take a look.

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Popularity: 58% [?]

We’ve had a feature request for the Debt Free Calculator we released yesterday and we’ve updated the calculator to address the issue. Here’s the request.

“I was using that calculator you released yesterday and, while I think it’s a great tool, I’m wondering if I might offer a suggestion. On the amortization schedules, having some kind of debt name would be a great help because it’s kind of confusing what debt exactly is being shown on each line. It looks like they’re being reshuffled, is that right?-Ron Guzmann”

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Popularity: 27% [?]

The average American has over $8,000¹ in credit card debt alone; add to that car payments, mortgages, and whatever else you can charge these days, and becoming debt free on the average American salary of around $48,000² seems like an impossible task. Most Americans are looking at the possibility of never getting out of debt unless they do something different. So here’s a method you may or may not know anything about that can save the average American at least $75,000 and almost 8 years in debt payments.³

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Popularity: 27% [?]

We’ve been hard at work on some really great, and free, financial calculators over the past several weeks and are going to be releasing them as they’re completed over the next month or so. We hope that you’ll find them to be a valuable resource in your search for the best mortgage/financial information on the web. Some of the highlights of what we’ll be releasing are:

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Popularity: 19% [?]

If you’re wondering where the current presidential candidates stand on economic views, Bankrate’s got a great series of articles on the topic:

• Candidate Views on the Subprime Mortgage Crisis
• Candidate Views on Employment
• Candidate Views on Social Security
• Candidate Views on Health Care
• Candidate View on Taxes
• Candidate Views on Education

Popularity: 16% [?]

Wow, the Fed is really getting aggressive with interest rates these days! We really did not see such aggressive cuts as something the Fed was going to do, but apparently a recession is obviously a major worry at this point, and inflation risk is something the Fed sees as worth taking on considering the current state of the economy.

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Popularity: 13% [?]