Since the start of 2010, the 15 year mortgage has become more popular in Charlotte, North Carolina.  A recent article in the Wall Street Journal gave some reasons why this is happening.

With the low mortgage interest rates, many homeowners are finding that a 15 year mortgage is more affordable than previously.  In addition, for those homeowners that have been in their house for 5-7 years, the leap to a 15 year mortgage isn’t as big of a stretch as it was then they bought their house a few years ago.

Should you consider a 15 year mortgage?

The Benefits of a 15 year fixed rate mortgage:

• Build equity in your home faster
• pay less interest
• forced savings account
• Benefit with low interest rate refinance without stretching loan term back to 30 years

The Cons:

• You have to make that higher payment each month
• A house is  a terrible place to store your wealth – better than spending, but worse than most any savings vehicle
• Opportunity cost – money used to pay down principal is money that can’t be used elsewhere
• Loss of flexibility – a future job loss or financial challenge could be catastrophic because of the higher required payment on the 15 year fixed mortgage

In some areas, a 15 year mortgage is a disaster for people – for example, someone who took out a 15 year fixed mortgage in Florida or Las Vegas in 2007 is now seeing that they send in a payment and the house price drops by more than the principal paid in.  How would it feel to send $1000 to your savings account and the next day have $0 left?  That is what many people experienced with 15 year mortgages in rapidly declining markets.

Which loan is best for you?

On the other hand, if you are in a stable housing market like Charlotte or Raleigh, North Carolina, the 15 year mortgage may not be so dangerous.  You will spend less on interest, build equity faster, and protect yourself from spending the money elsewhere – the forced discipline of this mortgage is helpful to some people.

If you have pretty good assurance that your income is going to be stable or increasing for the next several years, if you are already saving for retirement, have an emergency fund, and don’t carry other debts such as credit cards, student loans, or car loans, then you may be ready for the larger payment of the 15 year fixed mortgage.

If you have some credit card balances, don’t have several months living expenses already saved in an emergency fund, and aren’t putting away money for retirement or kid’s education, don’t get a 15 year mortgage – there are more important things to do with your money.

Before you decide to take on a 15 year mortgage, consider the best uses of your money, and make sure your new mortgage won’t prevent you from doing something more important.

Since the Great Depression, conventional wisdom said you should buy a house for both shelter and investment and pay off your mortgage as fast as you can.  No wonder many Americans store a large portion of their wealth within the walls of their homes.

Unfortunately, many of those people have seen their wealth disappear.

It’s time to re-visit conventional wisdom. With the real estate-led recession, many Americans are finding that 80 year old financial advice may not be right for today.

I believe the right mortgage should help you:

• Build and conserve wealth
• Become debt free as quickly as possible
• Achieve financial freedom
• Succeed Financially

In North Carolina, we work with our clients to help them develop a mortgage strategy that will allow them to turn their home into a castle.

If your last mortgage lender, or the loan officer you may have talked to recently isn’t talking about more than just interest rates, he or she is missing the point, and you are missing a great opportunity.

Sure rates are important, and by working with multiple lenders, we ensure our rates are always competitive.  Be sure to go the extra step and develop a strategy for your mortgage that will help you succeed financially.

Contact us for more information – we will offer you a free consultation to see if there is something better for you.

Thanks to Rick Melville, a Sr. Mortgage Planner at Fairway Independent Mortgage in Charlotte for this guest blog post:

Winston Churchill once said that “a pessimist sees the difficulties associated with every opportunity and that an optimist sees the opportunities associated with every difficulty.”

Just for fun I decided to do a little math problem this week. Rates actually hit 4.375% on some 30 year fixed rate programs last week (of course remember – rates are very situation-dependent, and subject to change with market conditions). Can you believe it?! There are people who are on the sidelines waiting for prices to fall further before they make the leap of faith that we have finally hit bottom.

Here’s what that looks like, if they wait for house prices to fall and stabilize while interest rates creep back to the level of just a few months ago (at 5.375%).

• $250,000 mortgage at current rates of 4.375% equals a Principal and Interest Payment of $1248.21.
• That same payment of $1248.21 at 5.375% would only get you a mortgage of $222,906.

In other words, the house they wanted at $250,000 would have to fall another $27,094 before the payment would just be the same as it is NOW at the higher price. Well, that’s another 11%! I’d say there is a greater risk of rates rising than prices falling that much further.

If affordability and payment are important to a buyer, then trying to time the low in house pricing could make for higher payments. For a family who plans to stay in their house for a long while, buying now is the opportunity being created by our current difficulties and WOW!

What an opportunity we have now.

Great points – today’s low rates could be better than a further 10% decline in home prices.  If you aren’t happy living where you are now – the low rates are making affordable homes even more affordable.

All day, every day, conforming and FHA mortgage rates in North Carolina are changing.  Rates move in response to hundreds of factors as mortgage backed bonds are traded on Wall Street.

Among the biggest influences on mortgage rates is the threat of inflation.  When traders expect future inflation, they will sell low yielding mortgage bonds in order to protect their investors.  If inflation is tame, like it is now, mortgage bond prices will rise, and interest rates will fall.

What is inflation, exactly?  Most people think inflation means ‘stuff’ costs more.

By definition, inflation is when a currency loses its value; when what used to cost $1.00 now costs $1.10. inflation really means that a dollar buys less.

As consumers, we recognize inflation by the items we buy on a daily basis becoming more expensive.  However, it’s not that goods are more expensive — it’s that the dollars we’re using to buy them have become worth less.

With mortgage bonds, the holder of that bond will get the principle and interest back with dollars that can’t buy as much anymore.  If an investor expects this, they would want more interest paid to compensate them.

Mortgage rates move opposite of bond prices, as inflation takes hold, mortgage rates rise as the bond prices fall.

Lately, inflation has been exceptionally low. The Federal Reserve acknowledged as much in its last statement to the markets, and available data backs that position.  This, after predictions that inflation would be “runaway” in 2010.

There is not much threat of inflation right now in the economy, so for a while at least, you can expect rates to stay lower, until the traders start to fear inflation in the future – when that happens, rates could shoot higher.

Many home owners in Charlotte and North Carolina are discovering it’s a great time to refinance their home loan.  With the unusually low rates of the past few weeks, we’ve helped homeowners:

• Shorten their mortgage term to 10 or 15 years without increasing their payment
• Save several hundred dollars each month in interest
• Convert from interest only loans to amortizing loans without increasing their payments
• Pay off credit cards, car loans, second mortgages and lower payments overall by several hundred dollars

Should you look into refinancing?  Yes, if:

• If you are employed, or have been self-employed for more than 2 years
• have an interest rate over 5.75% on any loan
• Have an Adjustable Rate or an interest only loan
• There is equity in your house and you have better uses for that wealth – like paying for education, paying off other debts, or re-building retirement accounts

What are the pitfalls?

Number one:  Appraisals. Since the HVCC, or Home Valuation Code of Conduct was forced on consumers last year, appraisers have been reducing home values across the country with impunity.  This ill-conceived regulation is the biggest roadblock – for some, just a speed bump, but for others, a dead end.  Unfortunately, the only way to find out a true appraisal value is with the actual appraisal that your lender orders for you.

As a safety valve, we recently started offering an AVM or Automated Valuation service on our branch website.  This $29.95 service will give you an educated guess if your house will appraise adequately for refinancing.  If you get an AVM here, and then refinance your mortgage with us, we will refund the cost of the AVM at closing.

Number Two: Credit Score. If you don’t have a 740 or higher middle credit score, you can expect to get a slightly higher rate than other with high scores.  Fannie Mae started charging borrowers higher fees for lower credit scores.  If you call, we can get you a free copy of your report and will tell you how much impact, if any, the score has on your rate.

If you don’t ask, the answer is no.  If you own a house, and have a rate higher than 5.5% right now, you owe it to yourself to look into refinancing now while rates are this low.