News

Dear Brenda,

Thanks to you, and more than 197,000 REALTORS across the nation, the Surface Transportation Reauthorization and Reform Act of 2015, which was signed into law does NOT include an extension of guarantee-fees.

The NAR Leadership Team and I would like to thank you and your colleagues for this record breaking level of support for a national Call for Action. Our state and local association partners did a great job in leading the efforts to stop Congress from taxing homeowners to fund the transportation bill.

This victory was made possible by the collective efforts of the NATIONAL ASSOCIATION OF REALTORS, and our state and local association partners. When REALTORS speak in a single unified voice, Congress listens.

If you’re trying to buy a home for your growing family but find that the pickings are slim, now you’ve got someone to blame: baby boomers. The Washington Post recently blasted this age group for clogging up the real estate pipeline. Apparently, experts say they should be downsizing into smaller homes now that their kids have flown the coop—but these empty nesters just aren’t budging.  “They appear to be staying in the family home longer than previous generations,” Sean Becketti, chief economist of Freddie Mac, told the Post. And this, he says, has created an “imbalance between housing demand and supply.”

Homeowners are less and less pushed to sell by market conditions, according to Seattle-based brokerage firm Redfin.
In an October survey, the company found that 16% of sellers considered the prospect of rising interest rates as one of three major incentives to sell their homes. This contrasts with 59% of respondents surveyed last year.  Instead, 29% of sellers said their top motivations included the desire to move to a larger home, while 27% cited relocating to a new city and 21% cited an aim to downsize. Nevertheless, when asked for their concerns about selling, the general economic environment was a top deterrent, mentioned by 32% of homeowners surveyed.

"Seller optimism is flying high right now," said Redfin chief economist Nela Richardson in a Nov. 12 press release. "But buyers are more grounded now and pricing a home too high is risky. More sellers are having to drop their initial asking price this fall than a year ago."

In this context, 20% of the 730 home sellers surveyed between Oct. 18 and Oct. 20 listed cashing in on the value of their home as a major reason to sell.

Mortgage interest is a double-edged sword. On one hand, it’s a tax-deductible expense, but it is also, by and large, the heaviest cost of homeownership.

Of course, deciphering how much interest you have left to pay off on a mortgage can be tricky. Here are a few quirks to be aware of if you’re looking to buy or refinance a home.

1. Interest works the opposite of rent

The amount of money you’re borrowing is based on a certain interest rate paid over the term of your loan. The longer the term the more interest you pay, spread out over the life of the loan. A shorter-term loan is more condensed with a higher payment each month, but less total interest paid overall.

Like rent, loan interest is paid in months. When you start paying your 30-year mortgage, for example, part of your monthly payment will go to principal, but the lion’s share goes to interest. It is not until year 10 that the inverse occurs and more of the payment starts going to principal. The majority of the principal will then be paid off during the remaining 20-year term left on the original 30-year loan.

Rent is due on the first of the month for that month’s obligation. Mortgage interest works in arrears. When you make your mortgage payment at the beginning of the month, you are paying the interest of the previous month.

Remember, a good credit score entitles you to better rates on your mortgage, so it may be a good idea to check yours before you apply for the loan. You can see your credit reports for free each year at AnnualCreditReport.com and your credit scores for free each month at Credit.com.

2. Refinancing is more complicated than you think

Keep in mind that when you refinance, your principal balance on a credit report or mortgage statement is not a payoff amount. The payoff is always higher than the current principal. That’s because the lender must estimate the amount of interest they need to collect before the loan term is up. The simple way to estimate a payoff when you refinance your home is to add a mortgage payment to your current principal. While this is not an exact calculation, it is a safe budgeting estimate when determining what you want your new loan amount will be.

Most mortgage lenders are nimble enough to tie your recent loan payment to your payoff amount. This is also a way to make your numbers lower at loan settlement (escrow closing). But if your loan is closing just after the first of the month and you’ve already made your mortgage payment, the payment could be refunded to you after closing or put toward the payoff amount.

Refinancing your home does not mean skipping a mortgage payment. Let’s say you close your loan on Oct. 15: Your new lender would begin charging you interest from the date that it finances onward. This means you begin incurring interest from Oct. 15 through Nov. 1 with your first payment on the new loan not due until Dec. 1. While you do not make a payment in the first month after refinancing, you are still paying for it in interest as part of the next month’s payment.

3. You prepay a month’s interest when you close on a home

The same interest concept applies when you close on a new home purchase. Your loan estimate will show the amount of prepaid interest your lender is using to estimate the amount of time it will take to close on your new loan. The prepaid interest amount can be adjusted based upon your closing date.

Referencing our October loan closing examples: If your loan closes just after the first of the month (say Oct. 5), you won’t have to make a mortgage payment until Dec. 1. All of the interest for November will be reflected in the Dec. 1 payment, and the interest for October will be collected at closing in the form of prepaid interest.

Interest is a driver of cash-to-close and is a recurring cost, meaning it’s an ongoing expense of homeownership, just like property taxes and insurance. The more informed you are as a mortgage borrower, the smarter choices you can make when applying for a home loan. Remember, if something does not make sense with the origination of your loan, ask your loan professional. He or she should be able to clearly explain any and all related mortgage interest questions.

Has your financial situation improved greatly since you first took on your mortgage? That’s great! You have some options, including paying off your current mortgage ahead of time or refinancing to a shorter term. When it comes to the former option, it’s important to make sure there isn’t a prepayment penalty and that your credit is in good shape. When it comes to the latter option, we’ve some more information for you. Check out the factors below to help you figure out if this is a good decision and how you might go about refinancing to a shorter-term mortgage.

The benefits of a shorter mortgage

Shortening your loan’s term means that you will pay less interest over the length of the loan. This means you will spend less on your home overall. You will also likely secure lower rates, but your monthly payments may be higher. It’s important to make sure this is sustainable for your financial situation before making a change. Your credit score will have a major impact on the rate you’ll be approved for, so know where you stand before you apply. You can check two of your credit scores for free on Credit.com.

If you can afford the higher payments, you will reduce your debt faster, pay less in interest and eventually be done with it altogether. Then you will be able to direct that monthly payment you had been setting aside to other financial goals. Your potential savings and home equity can allow you to make other investments or purchases, all while feeling more financially secure as you enter the next phase of life.

The precautions you need to take

You want to be sure paying off your mortgage early doesn’t pose a significant risk to your finances. The money you use should not threaten your emergency fund or other financial priorities. For example, if you can only afford to make the larger monthly payments by dipping into your savings or not contributing to your retirement fund, it likely isn’t a good idea. Since you will pay off your mortgage sooner, this will likely affect your tax situation.

Should you make the jump?

The first step is making sure changing the term of your loan makes financial sense. Calculate what you will save in interest costs over the life of the loan and compare that to what you will pay in refinance closing costs. If you will save more money than you spend, it could be a good idea.

The next step is contacting your current lender and asking them about your refinance options. Then it’s a good idea to shop around with other lenders to see if you can find better rates or terms.

This is not a decision that should be taken lightly, so evaluate the potential effects refinancing your mortgage could have on your finances before you make your choice. It may feel great to own your home outright and be mortgage-free, but not if it comes at the cost of other financial goals.