Answers to common mortgage questions(c) Canstockphoto / 3dfoto
Got mortgage questions? I’ve got answers. Quora is a popular internet site that invites users to pose questions on any topic. Quora refers the questions to experts in various fields who have volunteered their services. I am one of them, and questions about mortgages arrive daily.
I had not been doing this for very long when it became evident that the questions coming from Quora were very different from the questions submitted to me through my own web site, Mortgage Professor.com. Because the Quora questioners are generally less informed, some of their questions raise issues that are of interest to larger numbers of people than the questions submitted to my site. I have selected a few of the Quora questions that illustrate this point.
“Do the prices of houses in areas that are vulnerable to natural hazards, such as earthquakes and floods, reflect the risk that the hazard will occur?”
I do not know of any studies that bear on this question. My surmise is that it will depend on how long it has been since the hazard last materialized. If climate scientists estimate that the hazard has a 1% probability of occurring in any one year but it has not happened in the lifetime of those now purchasing homes, I would expect the impact to be negligible if not zero. In contrast, if the hazard hit the area last year, I would expect to see a major impact on prices.
“How did you save enough money to make a down payment on your first house?”
I defined the price of my target house, say $200,000.Here is the procedure I used, which does not require a PhD but does require a lot of discipline.
- I defined my target down payment, say $40,000 to avoid mortgage insurance.
- I defined the length of my waiting period, say 20 months.
- I created a special down payment deposit account.
- To meet the target amount within the target period, I had to allocate $2,000 to the special down payment account every month.
- On receiving my monthly salary, I immediately wrote a $2,000 check for deposit in the down payment account. Writing the check immediately made it a priority item.
“How does the mortgage interest rate work?”
Divide the quoted interest rate by 12. For example, a 6% rate in decimals is .06, dividing .06 by 12 gives you .005. That is the monthly rate of interest.
Multiply the monthly rate by the loan balance at the end of the preceding month to get the interest due for the month, For example, if the initial loan amount was $100,000, multiplying that by .005 results in interest due of $500.
Subtract the interest due from the monthly payment; the difference is the principal payment for the month. For example, if the payment is $599.55, as it would be for a 30-year loan of $100,000 at 6%, the principal payment is $99.55.
Subtract the principal payment from the loan balance to obtain the new loan balance of $99,400.45. Interest due the following month is based on this balance.
“Do you have any information or tips about using a HELOC for early mortgage payoff?”
HELOCs accrue interest daily while mortgages accrue interest monthly. So if you borrow $100 on a HELOC and include it in tour mortgage payment, you save a month’s worth of mortgage interest. If you get paid weekly and repay the HELOC during the month, the sum of the daily interest charges on the HELOC will be less than the interest saved on the mortgage. You have to do this every month, if you decide the result is worth the bother. I never did.
“What would happen if an immortal person got a reverse mortgage?”
If he moved out of the house, the loan balance would become due and payable after one year – the same as if he was mortal. If he continues to live in the house, however, the loan would never become due, interest would accrue forever, benefiting the investor who held the loan at the expense of the mortgage insurance fund, which is backstopped by the US taxpayer. Further, if the borrower had elected to receive a tenure payment when he took out the mortgage, that payment would continue forever as well.
Note that immortals would also bankrupt life insurers that sell annuities. Mortality does have its advantages.
“Should I extend my mortgage term from 15 years to 25 years to free up cash flow for travel, kids college and retirement savings? It would give me $600 more a month.”
Your three potential uses of the freed cash flow fall into two categories that ought to be considered separately. Travel and kids college are expenditures that replace debt reduction, reducing your future financial wealth. These expenditures may be justifiable for all sorts of other reasons — college will almost surely result in an increase in your kid’s future financial wealth, for example, and travel can increase your psychic wealth. You have to balance your loss against these potential benefits.
Retirement savings are a different matter and require a different mindset. If you transfer $100 to a retirement account that otherwise would have been used to reduce your mortgage balance, you lose the interest reduction on the $100 but you gain the interest or dividends earned on it at its new location. If you invest in a diversified portfolio of common stock, over a long period of time you are very likely to earn more than you lost by not paying down your mortgage.
Bottom line, you have two decisions to make that only you can make.