Thursday, January 24, 2008

Chance to shorten your mortgage?

One thing I've contemplated doing, and have done before to shorten the length of our mortgage is potentially taken out a Home Equity Line of Credit Second Mortgage. I have one in place now for $60k unused, and I've been thinking about it a lot more since the Federal Reserve cut rates by 3/4 point on Tuesday.

First a home equity line of credit is usually directly tied to prime. So with the prime rate being down to 3.5% it's looking to be a better deal than our 4.25% current first mortgage. This rate of course is variable but as long as it's lower than means less interest on our mortgage.

So what would I do? As am example I tempted to take out $10k and pay off $10k of our first mortgage. Then target the Home Equity line of credit to be paid off in 1 year. Basically focusing payments on a small portion of the mortgage rather than the large first mortgage.

On our previous condo we did this, we had a first and second mortgage. And when the second prime rate dropped, we took out more and started prepaying our first mortgage which at the time was 5.875%. It saved us so much we were able to refinance both mortgages 1 year later into a lower rate and smaller balance 1st mortgage. Also we threw all our extra money at the second and paid of $10k in 1 year because the rate was about 1%, while we grossed $42k/year combined. Yep, crazy.

But it takes discipline and firm financial plan. Meaning you have to earmark money for the second to make sure you pay it off quickly. I would consider it debt like a credit card. This is definitely risky, but for someone already trying to pay off their mortgage quickly, it could help lower the mortgage amount faster because more of the payment is going to principal.

This should not be done at the expense of retirement funding, savings, or college funding. However, when we did this, only I was a US citizen so we only had a $2k/year Roth IRA. DH could not qualify for a Roth IRA until marriage. Also I was a student without a 401k so our retirement savings options were limited. Hence, paying off the house seemed like an ideal solution to our extra savings.

I've been running scenarios about how much it would cost us to do this and if we could swing a $500/month payment right now. If so I could borrow $6k and pay off our mortgage by an extra $6k right now. But it depends on many factors, of which DH's raise and bonus next month will influence these decisions.

One problem is this does take away a person's liquid investments. And you could possibly have less cash on hand. But it's something worth considering. I do realize it's like shifting your mortgage to a 0% balance transfer CC. And I've considered that as a potential mortgage payoff strategy as well in the future.

On a message board I frequent, a man there paid off his house in 5 years using 0% CC offers, he kept on taking it out and prepaying his mortgage and paying his CC in full within the year. I think I might do this when DH is done with school and we have more free cash. I might be tempted to because it would motivate me to pay off our house sooner.

But for now it's all thoughts. A lot depends on what the rates for HELOC are, and where they appear to be going.

Another consideration, is if we borrow $20k and pay off our first mortgage, we'd be under the conforming mortgage numbers and we could potentially refinance our first into a normal mortgage instead of our current Jumbo mortgage. I think we need to really watch the rates and see what happens if it's worthwhile to increase our down payment and get a smaller first mortgage. Choices, so many choices.

But this is a great opportunity for people to look into refinancing if they have improved their credit score since they purchased their home, have paid off a large portion of the mortgage and might qualify for a better rate, or are looking to lower their monthly expenses.

5 comments:

Boomie said...

Wow!

That's all I can say.

Wow!

Jill said...

I've been reading so much about ridiculous mortgages and hearing so much from people who withdraw equity from their houses and such that it's like a breath of fresh air to read the words of someone else who believes a mortgage is there to pay off, as soon as reasonably possible. Thank you.

Living Almost Large said...

Boomie, LOL. It's a measure of potentially shortening the mortgage by a few thousand.

I'm not a debt lover, but I like to manage my money properly. DH and I are both science/numbers based people. We do what makes sense numerically.

We also like risk. But it's gotta be calculated risk. Hence why it depends on factors I can't see right now.

Also this is mimicking the mortgages in Australia where you get a HELOC for a 1st mortgage and then pay it off using every extra penny of savings. So it constantly goes down faster.

Like I said, you have to expand your mind to save money. Canadians mostly use 5/1 Arms, but their mortgage typically last 15-20 years. To them 30 years is crazy. Also they typically put down 25-30% minimally. But they view a 5/1 Arm mortgage as STANDARD.

So think outside the box and look at how you can save money on anything. If I can save money (lower interest) on my house, it's worth looking into.

Boomie said...

LAL-I read your blog daily. Every single day you post interesting topics and discussions. Yes, you have a different way of looking at things and I find your ideas enchanting. I consider your blog to be the tops!

Again, may I reiterate: WOW!

Living Almost Large said...

Thanks Boomie.