Your Mortgage : How to...

QUESTION: What do you think of biweekly mortgages? I have been approached by a loan agent who, for a fee, will restructure my home mortgage into a biweekly loan. She claims I can thereby cut the loan down from 30 to 20 years and save thousands of dollars. What do you think?

ANSWER: You can accomplish the same result on your own. Biweekly mortgages are the equivalent of 13 instead of 12 monthly payments every year. Another way of looking at the situation is to take your monthly payment, divide it by two, and make loan payments every two weeks.

The secret for a successful biweekly mortgage is the lender must be given authority to withdraw funds automatically every two weeks from your checking or savings account.

But you can accomplish the same result by making the equivalent of an extra monthly payment every year. For example, suppose your monthly mortgage payment is $1,200. Just add one-twelfth of the payment, $100 in this example, to your regular monthly payment and instruct the lender to apply the extra amount to pay down the principal balance.

At the end of the year you will have made the equivalent of 13 payments instead of 12. And you will accomplish the same result as a biweekly mortgage.

Don’t Worry if Your Lender Sells Mortgage

Q: My mortgage lender recently sold my loan to an investment company. If they go bankrupt, what happens?

A: The sale of mortgages and the loan servicing is a multibillion-dollar business. When your home loan was sold it became an asset of the new mortgage company. If they go bankrupt, your mortgage is one of their assets in bankruptcy. You would be notified to make your mortgage payments to the bankruptcy trustee.

If you’re concerned about making loan payments to an insolvent S&L;, don’t worry. People make loan payments to several insolvent Texas S&Ls; and there is no change in their loan servicing. Should your new lender close its doors, your loan will be sold to another lender.

However, if you were hoping that you might get out of paying your mortgage, forget it. You still owe the loan balance but the lender cannot accelerate your payments due. If you need more information, please consult a real estate attorney.

How Deed of Trust and Mortgage Differ

Q: You often refer to “mortgages,” but our house has a “deed of trust” to the bank that loaned us the money to buy our home. What is the difference?

A: Mortgages are referred to because everyone understands that security device concept. There are only two parties to a mortgage. The lender is called the mortgagee and the borrower is called the mortgagor. If the borrower doesn’t make the monthly payments, the lender forecloses and the borrower loses the property.

However, lenders prefer deeds of trust in states that permit them. There are three parties to a deed of trust.

The borrower is called the trustor. The lender is the beneficiary. But the third party is the trustee who, theoretically, holds “bare, naked legal title.”

However, the trustee has nothing to do until either the loan is paid off (when a deed of reconveyance is recorded by the trustee), or the borrower defaults and the trustee handles the foreclosure. Lenders prefer deeds of trust because foreclosure does not involve court delays and can be completed much faster than with a mortgage which usually involves a judicial sale.

Disadvantages of Paying Mortgage Early

Q: I disagree with your recent advice to that homeowner who is paying $50 extra each month on his mortgage payment. You even suggested he increase his extra payment to $100 per month to save thousands of dollars of interest by cutting his mortgage term. That is correct.

But you conveniently overlooked the extra income taxes he will pay since his interest deduction will decline each year and if he should want to sell the house, homes with large mortgages sell easily, whereas homes with small loans and big equities are the most difficult to sell. Your comments please.

A: Your suggestions are very valid, but the benefits of paying off the mortgage rapidly outweigh the disadvantages you list. As for the income tax savings from the interest deduction, it doesn’t make much sense to pay $1 of interest to get 28 cents of federal tax savings.

Saving the interest is more profitable than saving income tax dollars. But when an owner expects to sell the home within a few years, I agree prepaying the mortgage is not a great idea since homes with big mortgages usually sell faster than those with small mortgages and large equities.

Why Some Rates Go Up While Others Drop

Q: I have an adjustable-rate mortgage at 10.6% interest. It is tied to the Cost of Funds Index. Do you think I should refinance now to get a fixed-rate mortgage? Why is my adjustable-rate mortgage’s interest rate rising although I hear mortgage interest rates are falling?

A: The general rule is it pays to refinance if you can reduce the mortgage interest rate at least 2% and pay for the refinance costs from mortgage payment savings within three years. Of course, this “two and three rule” has exceptions, such as if you need to take out tax-free cash or you would sleep better with a fixed rate mortgage.

The reasons interest rates on most adjustable-rate mortgages are rising are many ARMs have maximum annual interest rate increase “caps” and the loan has unused increases that the lender can use before dropping the interest rate if the index declines and the Cost of Funds Index lags money market rates and is still increasing although general money market rates are falling.

When interest rates rose, ARM borrowers didn’t complain about the delay in increasing their payments. But since interest rates dropped, ARM borrowers are complaining that their interest rates haven’t fallen.

As a result of this mixed-up situation, mortgage lenders are originating mostly fixed-rate mortgages rather than ARMs. Currently, there isn’t much saving for getting a new ARM, so most borrowers are taking the fixed-rate mortgages. But in your situation you won’t save much interest and will incur refinance costs so I suggest you keep your ARM unless interest rates drop substantially.