We Paid Off Our Mortgage: History and Commentary

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We paid off our mortgage. We contacted Provident Funding and requested the full amount due including any accrued interest, the money was sent via bank wire, and the loan is recorded as paid in full. As you might imagine, I spent many hours contemplating this move. In a somewhat anticlimactic fashion, the letter below warning us we had to pay the property taxes ourselves was the first physical acknowledgement of the occasion. I found it amusing that it was addressed “Dear Homeowner”, as I never really felt like I owned my home until now.

A bit of history. When we first bought our home, we looked at the common rules of thumb regarding house affordability and ended up paying 20% down with a initial mortgage less than 3 times our combined income. Indeed, we qualified for the mortgage on my wife’s documented income alone. We thought about getting a 15-year note but went for the flexibility of the 30-year note, while paying it down at the 15-year pace. Over subsequent refinances, our interest rate dropped from 6% to 3%. Even though this made our required monthly payment much less, we kept up the higher monthly payments which had us on the pace of a 10-year payoff.

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Rule of Thumb: When To Pay Off The Mortgage Early

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There was a lot of good discussion in my lengthy early mortgage payoff post. Now instead of lengthy details, let me try out a quick rule of thumb about early mortgage payoff. Recall from Wikipedia:

A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination.

So roughly applicable to many – but not all – situations.

Early Mortgage Payoff Rule of Thumb

You should time your mortgage payoff date to coincide with the date of retirement, or semi-retirement. Here, I would define retirement or semi-retirement as a time when you’ll be wholly or partially dependent on non-work income like Social Security, pensions, annuity payments, stock dividends, or other investment income. A downshift into a lower-paying second career would count as a semi-retirement.

In my humble opinion, this quick and dirty rule will help you balance the opportunity to invest in potentially higher-returning investments (stock mutual funds, dividend-paying stocks, real estate, high-yield bonds) with pursuing the benefits of having a fully-owned house (less stress, less leverage, lower required monthly expenses, lower required withdrawals from investments and thus lower marginal tax rates).

Example 1. 20s, 30s, 40s with long future career. You love your job and/or want to be doing it for the next 25+ years. In this case you have lots of human capital and a regular stream of income. You also won’t be needed to cash out your retirement assets for a long-time, making it much more likely that your stocks will achieve their higher average returns. Take on the 4% interest rate fixed for 30 years, and over time your salary will rise with inflation while your payment stays the same.

If anything, you could do a DIY biweekly payment plan and pay off your mortgage in under 24 years with less “pain” due to a behavioral trick (works best for those on a biweekly paycheck schedule).

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Pay Off Mortgage Early vs. Save More For Retirement? Digging Deep Into The Details

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In the world of personal finance, you can always generate a good debate if you talk about paying off your mortgage early. The argument usually boils down to something like this:

If your interest rate is 4%, then paying extra towards that mortgage will earn you 4%. If you think you can earn more than 4% elsewhere, then don’t pay off your mortgage.

However, when it comes down to if YOU should pay extra towards YOUR mortgage, the above statement is an oversimplication. As Einstein is credited with saying, “Make everything as simple as possible, but not simpler.”

Since I am faced with this decision myself, let’s address the implied assumptions in the sentence above and all the other little details that go into the decision.

Warning: This is a braindump post and thus rather long and detailed…

Assumption #1: Your mortgage interest is 100% tax-deductible.

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TreeHugger CEO Apartment: 420 Square Feet, 8 Rooms

I’m surprised I missed this earlier since I love this type of thing, but below is a nicely edited video from Gizmodo showing the 420 square feet apartment of TreeHugger.com CEO Graham Hill. It’s cool how they fit in the claimed 8 rooms using moving walls, floor-to-ceiling storage, and clever furniture and appliances: living room, office, bedroom, guest bedroom, dining room, bathroom, kitchen, and I guess they’re counting the closet as a room? You really have to see it to understand.

I like this concept, especially when efficient use of space allows you to be able to afford to live in the heart of a good city where you can do much of your “living” outside in parks, cafes, bars, and restaurants. I’ve seen the moving wall before inside this Hong Kong apartment (only 344 sf), and much of the furniture is from Resource Furniture (eek, that fancified murphy bed costs $12,000). Installing solar panels (on the window shades?) with battery storage is a nice touch, and I’d consider the portable induction burners and combo microwave/induction oven for my own place.

More on this apartment: LifeEdited, New York Times

Related posts:

Paying Down a 30-Year Mortgage Faster vs. 15-Year Mortgage

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What a difference a year makes. In August 2011, I did a mortgage comparison of a 15-year at 3.75% vs. 30-year at 4.75%. Now I’m redoing that same comparison at current market rates of 30 yr @ 3.25% vs. 15 yr @ 2.625%! To be fair, the numbers I used in 2011 were somewhat high.

In any case, the purpose of this comparison to compare the numbers if you wanted to pay down a 30-year mortgage in a 15-year accelerated timeframe, as opposed to just going with the lower interest rate and mandatory higher payment. I’ll be using the mortgage calculators at Dinkytown.

The 30-year at 3.25% would have a monthly payment of $1,305, while the 15-year would have a monthly payment of $2,018. Now, what would happen if we simply paid the $2,018 towards the 30-year mortgage? Using the calculator, we would enter an additional monthly payment of $713. That tells us the 30-year-plus-extra mortgage would be paid off in 15 years and 11 months, requiring 11 additional payments of roughly $2,000 and thus an extra $22,000 of interest in the end. However, the 30-year does allow me the flexibility to reduce my payment by about $700 a month if things get tight. Is the higher cost worth the extra flexibility?

I thought so when I got my first mortgage, but changed my mind once I figured that if I were to hit so hard that I couldn’t make the 15-year mortgage, I probably wouldn’t want to keep paying the 30-year either and would just sell the house and move somewhere cheaper and smaller. I viewed the potential payoff of going with the 15-year mortgage as being to retire one full year earlier.

Lots of people see the low interest rate for the 30-year mortgage and want to use that money to invest in the stock market. That may work out well if you actually invest your money as planned, I don’t know. I personally have enough invested in the stock market as it is, I don’t really want the extra leverage of essentially investing on margin with borrowed money. There is also a chance that the mortgage interest deduction may get capped or phased out over the next several years. That’s a lot of unknowns. I do know a top rate for a long-term certificate of deposit is the 10-year CD from Discover Bank with a yield of 1.90% APY. Meanwhile, the yield on a 30-year Treasury is 2.79%.

In the end, I don’t think there necessarily is a right or wrong answer. There are even more small nuances that went into my decision process, I’ll try and gather those thoughts for next week.

Mortgage Rates Still Dropping: Good Time To Switch From 30-Year to 15-Year?

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In case you haven’t been paying attention, mortgage rates are still dropping to new lows. Here’s a chart of the historical mortgage rate averages since I bought my house in late 2007, courtesy of HSH.com. It includes the 30-year fixed, 15-year fixed, and the 5/1 30-year adjustable.

From looking up some quotes (see below), 30-year fixed rates are ~3.125% now (~3.5% with no closing costs), and 15-year fixed rates are ~2.5% (~2.875% with no closing costs). Can you honestly say that you would have expected this 10 years ago? Another example of the difficulty of predicting the future.

If you haven’t refinanced in a while, it is definitely worth a try to see how much you could save a month. But what are you going to do with that savings? Buy more stuff that you don’t need? Buy more house that you don’t need? Why not consider refinancing into a 15-year mortgage and have that house paid off much sooner? From this CNN Money article using recent average rates:

Homeowners current paying off 30-year loans with rates of 4% spend about $1,098 a month in mortgage payments on a $200,000 balance, paying a total interest cost of $143,739. Refinancing at 2.63% for 15 years would cost them about $250 a month more, but they would wind up paying just $42,250 in total interest and their payments would end years earlier. Refinancing into another 30-year loan at 3.31% would cost homeowners only $877 a month, saving $221 from the existing loan.

If were to give advice to my future kids, it would be to determine home affordability only using the 15-year mortgage. Just forget the 30-year exists. You’ll be forced to budget properly and if you buy a house at age 30 you’ll be mortgage-free by 45! I think they would thank me in the end. I can still tell them their old man paid his off at 35, of course. ;)

Compare with rate quotes from:

I hear that Costco provides a mortgage refinance referral service now as well – any real-world experience with them from readers?

Recent mortgage refinance articles:

Zillow.com Adds Free Foreclosure Listings

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If you’ve ever tried to research buying a foreclosure or short sale online, you’ve probably found a lot of sites either plastered with ads or charging expensive subscription fees in order to access “exclusive” foreclosure listings. Well, the good news is that real estate site Zillow.com recently announced that it has added nearly 2 million free listings of “pre-market inventory” to its database. (Via Techcrunch.) This includes full addresses and details on pre-foreclosure, foreclosure, and bank-owned properties not included in the usual MLS databases.

You must register to see the foreclosure listings, but it’s free and all you need is an e-mail (name not required). I looked around my neighborhood and found several homes that are in the foreclosure process or already sold via auction, often complete with winning bid amounts. There’s a house down the street that is pretty nice and will be auctioned off live at the county courthouse next Friday; I might attend that auction for the experience. I’m told these are auctions where you need a cashier’s check for the full 6- or 7-figure sale price right on the spot.

Based on my limited understanding, if you want to buy a foreclosure it’s still helpful to work with an experienced real estate professional. Zillow makes their money if you ask them to refer you to a local “foreclosure specialist”. Sounds fair to me, if you don’t already have one in mind. I’ve had friends attempt to buy a bank-owned REO property which sounded like a good deal on paper, but required huge amounts of time and patience. Finding a good rental property always sounds nice in my mind, but I haven’t had much time to pursue it further.

Zillow Map – Percentage of Underwater Homes By Zip Code

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Do you owe more on your house than it’s worth? How many of your neighbors are underwater? Are things brighter in the next zip code over?

Zillow has a very revealing Negative Equity Map that shows the percentage of homes in your area that have negative equity. The numbers are recent, last updated based on Transunion data from the first quarter of 2012.

I checked out the San Francisco Bay Area and saw a lot of red as expected, but also several pockets of lighter colors. More evidence that real estate is local?

I then pulled up the map for Austin, Texas where my sister lives, expecting (based on anecdotal evidence) to see a completely different picture. It’s better, but there are still areas of pain:

Lessons From Micro Units, Small Spaces, and Tiny Houses

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Last week, New York City mayor Bloomberg announced a design competition for new “micro-unit” apartments ranging from 275 to 300 square feet (press release). The goal is to address the increasing demand by smaller households, as the average rent for a studio in Manhattan is now $2,065 a month. Here’s a sample proposed layout:

I’ve always been intrigued by small spaces, from tiny homes that you could buy with P2P loan instead of a mortgage, to the capsule hotels of Tokyo. Even if you don’t live in such a place, I think everyone can still learn from them new ways to use their own space more efficiently.

Go vertical to maximize space.

The NY Post did a profile of a young couple who live in a 240 square-foot studio in Brooklyn Heights. The picture below pretty much includes the entire place, with the ladder leading up to their bedroom:

Just like bunk beds and college dorm design, raising a bed is often the easiest way to get more storage or desk space. This concept doesn’t just apply to beds though. Put new shelving and storage up higher – look for wall space above toilets, above sinks, above your bed headboard, above desks. In your garage or carport, store bicycles and more in the space above your cars.

Buy one thing, get rid of another.

The free gym at my last university was always quite crowded, leading to a “one out, one in” policy where you had to wait for a person to leave before you could enter (also used at nightclubs, or so I’ve heard.). If you want to avoid stuff overload, you should implement the same policy when buying new things. Throw away, donate, or sell. New pants in = old pants out. New toy in = old toy out.

Use creatively-designed furniture.

Raising beds can get tricky for those with physical handicaps. I’ve always like the idea of Murphy wall beds as an alternative, and am thinking of installing one in my current office to be an extra guest bedroom with this DIY kit. There are a lot of other cool multi-tasking furniture out there as well. Some can get pretty expensive, but it may be worth depending on the cost/square feet in your area.

Here’s a cool video from a previous post on Resource Furniture:

Here’s another video of an apartment in Hong Kong that uses sliding walls to transform one big room into either a bathroom, kitchen, living room, or a bedroom. Very innovative, and all in 32 square meters (~345 square feet).

Who Really Owns My Mortgage?

Have you ever wondered who really owns your mortgage note? You pay your mortgage each month, but where do those payments end up? Perhaps you’re thinking of obtaining a loan modification or refinance through the Home Affordable Refinance Program (HARP), Home Affordable Modification Program (HAMP), or other program under the Making Home Affordable (MHA) umbrella. Or maybe you’ve read that banks are foreclosing on people without proper records and want to know if anyone out there actually can show you your original mortgage note.

First, remember that the loan owner isn’t necessarily the same as your loan servicer. Your loan servicer is the company that sends you mortgage statements, takes your payments each month, and if you have an escrow account, pays your homeowner’s insurance and property tax bills. So where do you start looking?

  • Ask the servicer. They are legally obligated to tell you the name, address, and telephone number of the owner of your loan as shown in their records. It may be a good idea to ask them in writing officially with a “qualified witten request” via certified mail while keeping a log of your communications. The name of your servicer should be on your mortgage statement, but you can also use the MERS link below.
  • Original lender. Your loan may have never been sold, and still kept as a “portfolio loan” with the original lender. What a concept!
  • Fannie Mae. In reality, many loans are sold to FNMA aka “Fannie Mae”. See Fannie Mae loan lookup tool.
  • Freddie Mac. Similar story with Federal Home Loan Mortgage Corporation (FHLMC) aka “Freddie Mac”. See Freddie Mac loan lookup tool.
  • Mortgage Electronic Registration Systems, Inc. (MERS) is a big online registry designed to replace the costly process of publicly recording mortgage ownership at the local government level with a private electronic version that allows the swapping of mortgages with no friction at all. MERS tracks both the servicing rights and ownership of mortgage loans in the United States, although the accuracy has been called into question. See MERS ServiceID lookup tool. You can also call them at 888-679-6377.

Provident Funding Mortgage Refinance Review

We finally signed the closing documents on our most recent mortgage refinance. We ended up going through the same local mortgage broker who linked us up with Provident Funding, which is apparently one of the largest private lenders in the country. Before going through them, I read some reviews online and the main complaint seemed to be that their underwriting was overly strict. I decided to go with them anyway because:

  1. They had the lowest rates at the time for a no-cost refi,
  2. With such high loan volume, I figured I should expect some complaints based just on the numbers (happy people rarely leave lender reviews),
  3. We are very qualified for the loan so it shouldn’t matter anyway. Our loan-to-value ratio was well under 50%, much less than the 80% that most loans require. Great credit score, good income.
  4. We trusted our broker to help guide us through the process.

So how did it go? One reviewer described the loan approval process as “cookie cutter” and a “gauntlet”, and I think that is a very apt description. The underwriting is very robotic and inflexible. For example, my wife already has plenty of stable, W-2 income to support the loan by herself. I decided to keep my name off the application explicitly to keep things simple since I have both W-2 and 1099 income. Yet, Provident still required proof that the “excess” income on our tax returns was connected to me and not my wife. Why would you care where the extra income came from?

Another example is regarding bank statements. I understand the need for historical bank statements, but any deposit or withdrawal over something like $5,000 needed full documentation as to source and reason. Never mind what our total balances were. If they don’t like the reason, it is grounds for denial. This is annoying, especially if you move money around a lot like I do. The really stupid part? I finally discovered that the bank doesn’t even need to be the deposit source for your paycheck. In that case, since they don’t care about long-term balance history but instead want the appearance of blandness, I luckily had lots of bank accounts to choose from and simply chose the “cleanest” one to finally satisfy them.

In addition, the bank account that you submit the statement for is the one that you need to fund closing costs via cashier’s check. I suppose this proves you own it? The only bad news was that my “clean” account was an online bank, so I had to pay for a $30 outgoing wire fee in place of the free cashier’s check I could have gotten from a local bank.

Recap: Provident Funding has very competitive rates, but with strict underwriting requirements that often lack common sense. You should be wary of them if you are a non-standard applicant in any way (self-employed income, recent job change). There are many complaints that people lost the house they had under contract because they were eventually denied their loan or did not close on time. The total time from loan application to closing on our refinance was approximately 45 days. If you have a great credit score and nice, stable W-2 income with good ratios, then go for it if their rates are the best and you’re willing to trade a few headaches for it.

Compare with rate quotes from:

Related mortgage refinance articles:

Don’t Fall For These Common Mortgage Refinance Myths

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Mortgage rates are still setting record lows! Qualification is still very difficult to refinance for those with little home equity, but there’s still many people out there that are eligible (maximize your appraisal). Don’t miss your opportunity to lower your interest costs and own your home faster by believing in one of these common mortgage refinance myths:

#1 I don’t want to pay the high closing costs again.

It’s true, when you refinance there will be additional costs. The mortgage broker has to eat! However, that doesn’t mean you actually need to pay anything extra.

First of all, you can get paid for negative points. Depending on the interest rate, the originator/lender will actually pay you a credit each 1 point = 1% of the loan principal. The lower the rate, the less points you’ll get. But if the credit is high enough, that may cover all your costs, making it a “no-cost” refi. Alternatively, they may simply advertise “no closing costs” which means they cover a certain list of fees.

When you apply for a refi, you’ll get a Good Faith Estimate (GFE) with a total closing costs amount listed at the bottom. However, you should separate the true costs from the stuff that you’d otherwise have to pay anyway, including:

  • Prepaid or partial month interest
  • Homeowner’s insurance to escrow
  • Property Taxes to escrow

The remaining amount (origination fees, doc fees, application fees, appraisal fees, title insurance, credit report fees, etc.) is what I would just call the true cost of refinancing. Some “no closing cost” lenders still make you pay the title insurance fee.

#2. I can’t refinance because it’s been too soon since my last financing.

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