Thursday, July 12, 2012

Let's push 15 year refinances.

If someone refinances a 30 year 6 percent mortgage (with 27 years of payments left on it) into a 15 year 2.86 percent mortgage, the payment goes up by 10 percent, which is not nothing.  But within 5 years, more than 25 percent of the principal  on the 15 year mortgage is paid down.  For those who can afford the payment, this would largely solve the underwater mortgage problem.


Eric Morey said...

"The average rate for a 30-year fixed mortgage fell to 3.56"
Payments of $452.40 per $100,000 borrowed.
Or $147.15 (24.5%) LESS per month compared to a 30 year 6 percent per $100,000 borrowed.

"The average 15-year rate dropped to 2.86 percent"
Or $683.87 per $100,000 borrowed.
Or $84.32 (14.1%) MORE per month compared to a 30 year 6 percent per $100,000 borrowed.
(Why am I calculating a 14% increase where you quoted a 10% increase? Did I make an error?)

One choice of refinancing an underwater property is between 15 year and 30 year terms. What incentive would convince a borrower to choose 15 over 30 years, or $231.47 (51.2%) MORE per $100,000 borrowed?

Unknown said...

Refinancing to focus on the principal debt makes perfect sense.

Richard Green said...

@ Eric, I am assuming there are 27 years left on the life of the mortgage being refinanced.

Unknown said...

Some people are seeking to pay off their mortgages before they retire; others are scarred from the financial crisis and want to chip away at debt as fast as they can. Not only do these borrowers get a lower rate, but when a mortgage is amortized over a shorter term the borrower pays less interest over the life of the loan. The trade-off is that your monthly mortgage payment likely will be higher since you're paying off the same principal over a shorter period.
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