Tips for paring down your mortgage
There are myriad strategies for homeowners eager to slash thousands of dollars off their mortgage debt, providing they stay put for a while.
Special to The Seattle Times
Adzookie, a free advertising network for mobile devices, in April offered to pay the mortgage for homeowners in exchange for turning their houses into massive billboards. The response to the California startup's promotional gimmick was swift.
"It really blew my mind. I knew the economy was tough, but it's sad to see how many homeowners are really struggling," says Romeo Mendoza, CEO of Adzookie. He said the company fielded about 15 to 20 applicants every minute on the first day. To date, Adzookie has received more than 20,000 requests from homeowners as far away as Japan, London and Russia.
He says more than 100 requests have come from the Seattle area
Indeed, hard times call for creative measures.
But beyond billboard advertising or homespun solutions, such as charging someone a fee to store a boat or motorcycle in your garage, local experts agree there are myriad strategies for homeowners eager to slash thousands off their mortgage debt.
Patrick A. Crandall, senior loan officer with M&T Bank's Mortgage Division in Kirkland, says clients are expressing an interest in paying down their current home loan.
"Borrowers seem to be more focused on creating equity through principal reduction versus relying on property appreciation. And as baby boomers progress toward retirement years, owning their home free and clear becomes more appealing," he says.
"Some apply their income-tax refund or annual bonus while others use a regimented payment plan aiming for a specific payoff target date," says Crandall. Others use the interest rate on their home loan as a benchmark for the expected rate of return on their investments.
"If they feel they can reasonably earn more in their investments than the rate they pay on their loan, they invest the money; if not, they use the money to pay down their loan," he says.
In any case, Crandall recommends homeowners contact a financial consultant for advice.
Refinancing a mortgage is another common strategy, especially if the term of the loan is also shortened. But it's important to realize costs are involved, says Erin Lantz, a Zillow mortgage marketplace director.
"You want to be sure you are going to save enough to cover the refinancing fees," she says.
The portion of borrowers refinancing in January who took 15-year mortgages rose to 29 percent from 11 percent two years earlier, according to the most recent data available from CoreLogic, a real-estate information firm in Santa Ana, Calif. Mortgages with 30-year terms accounted for 52 percent of refinancings in January, down from 80 percent in January 2009.
The share of cash-in refinancings reached a record 44 percent in the fourth quarter, according to data from Freddie Mac dating to 1985. While the share fell to 21 percent in the first quarter as mortgage rates climbed, it was almost double the quarterly average over the past 26 years.
Refinancing applications have increased 36 percent since the start of the year, according to a Mortgage Bankers Association index. The average weekly rate is about a third below last year's pace as millions of Americans can't qualify for a new loan.
Besides the costs associated with refinancing, homeowners need to "weigh the benefits of a lower interest rate against the drawback of resetting the mortgage clock to zero," adds Cathy Cooper, a spokeswoman for Washington Federal.
For a shorter loan payoff time and reduced interest paid on the loan, new homebuyers might consider a biweekly — not twice monthly — payment plan where 50 percent of the usual monthly principal and interest is paid toward the mortgage, Crandall says.
This amounts to making the equivalent of 13 monthly payments in a year, he says. "A 'true' biweekly loan typically needs to be set up at the time the loan is closed," notes Crandall. In other words, be wary of companies that market biweekly payment plans after the loan closes.
If the loan is already established, however, homeowners can save on interest while building equity similar to the biweekly loan, simply by adding 1/12th of the monthly P&I to their normal house payment, Crandall says. "This option comes closer to simulating the principle reduction of the 'true' biweekly loan as opposed to paying the 13th payment in one check, once a year," he says.
Making one extra mortgage payment a year also has an upside. It is a simple action that homeowners can take that doesn't require someone to change monthly payment behavior, Lantz says.
According to Zillow, an extra payout of $1,199 principal and interest each year on a $200,000 loan, based on a 30-year fixed-rate mortgage with an interest rate of 6 percent, applied exclusively to the principal, could save a whopping $47,000 in interest payments and cut five years off the life of the loan.
Making biweekly mortgage payments or one extra payment yields the same result, Cooper notes. But with the former, "you are obligated to make 26 payments over a year's time; it locks you into a contractual obligation," she says.
Conversely, there is more flexibility by making one extra payment per year if your budget is tight, she adds. "These concepts are especially important in an environment where home values are flat, and you can't rely on rising values to build equity," says Cooper.
For some homeowners, modifying their payment method is way beyond their comfort zone.
Simple adjustments are not something most homeowners spend time thinking about after signing on the dotted line and moving into their home," says Lantz, who urges homeowners to learn the basics about how their loan is structured to help whittle down their mortgage debt.
"Knowledge is power," she says.
There are also liquidity risks to accelerating the pay down of your loan, Crandall warns.
"Once funds are applied to the loan, it is very difficult to access the money. It is a good idea to have a reserve fund for day-to-day needs and emergencies set aside before paying down the loan," he says.
Meanwhile, Mendoza, of Adzookie, continues to sift through mounds of applications: "We're going with what feels right." And rest-assured, he says, Seattle is on the docket.
Bloomberg News contributed to this report.