Los Angeles is a culturally diverse international city. In terms of population, Los Angeles doesn’t rank that high for population compared to other international cities with larger populations, that is because we have smaller sized cities in the US. Los Angeles is the second-largest city in the US right behind New York. The resident population of Los Angeles is 4M in the city and 10 million for the greater metropolitan area of Los Angeles. Buyers who are coming from overseas may be used to larger city populations – especially if you are coming from China which has the world’s largest cities. Where Los Angeles really shines (Aside from our great weather of course!) is its strong economy. Gross Domestic Product (GDP) in Los Angeles ranks as the #3 largest city in the world based on GDP with an approximate $750 Billion-dollar annual GDP. Only Tokyo #1 and New York #2 rank higher. For international buyers, I believe Los Angeles is one of the bestcities in the US to invest in and a great way to diversify assets.
I find that most international investors buy in the U.S. either as an investment, vacation home– or both. Buying in the US can also make sense if you are planning to relocate here.
When Buying a property in Los Angeles, if you are not a US citizen, obtaining financing for a US real estate purchase can be a little bit more difficult than normal. I think a lot of foreign buyers are not aware that there are foreign national loan programs out there designed specifically for them otherwise more foreign national buyers would obtain loans on purchases. There just isn’t a lot of information on the internet about Foreign national lending so I want to share more on the subject since I work with a lot of international buyers. Foreign national loans have slightly higher fees and higher interest rates than normal loans, so expect to pay a small premium for the ability to get a loan.
Some foreign buyers don’t want to go through the hassle of getting a loan and just buy with all cash. Buying a property all-cash makes purchasing property in the US easier. According to the National Association of Realtors, the difference between foreign nationals buying all cash versus getting a foreign national loan is split almost evenly, about 50/50.
Am I a Foreign National?
A Foreign national is anybody who is not a US citizen and not a permanent resident in the US. If you are buying a property in the US to establish yourself as a permanent resident- it takes time to do that by getting a Green Card or VISA. Lenders will not believe you are a US citizen just because you are moving to the US and buying property. If you already live in the US and have a green card you are a resident alien (not the spaceship kind). You are subject to the same taxes as a U.S. citizen. There is also Non-Resident Permanent Alien – This is a person who does not meet the Green Card test of Substantial Presence and is usually in the US on a VISA. Whether you are a Foreign National, Permanent Resident, and Non-Permanent Resident all of these groups can get a mortgage loan.
The terms of foreign national loans change based on the current US lending environment. In stricter times during recessions, lender requirements tighten- lenders want higher down payments of 40%, offer adjustable-rate loan programs only instead of fixed-rate programs, may ask for more documentation, and may take longer to close, taking 45 days instead of 30 days. Over the years working with foreign nationals I have observed the loosening and tightening of the lending terms. We are currently in a loose lending environment in the US since we are still in economic expansion.
Banks underwrite foreign national loans as investment property loans. The nice thing about underwriting the loan this way is it doesn’t require as much documentation which is always one of the biggest obstacles for foreign nationals. No tax returns are required for foreign national loans. Sorry, if you are not a US Citizen or Residential Alien, you will not be able to get a primary residence home loan on your US purchase which will have the standard loan fees and interest rates. TWO MAIN THINGS: LTV and Property type, banks like single-family better than condos or income properties
Not every bank offers foreign national loan programs. This is a very specialized program that not every bank does. I have found the best success with international banks like HSBC, East West Bank and China Trust to name a few for the big banks since they have international customers who they want to provide this service for. US-based domestic banks like Wells Fargo, Chase, Bank of America don’t like to lend if you don’t have US Tax Returns and usually won’t have a foreign national loan program. In addition to the big international banks, there are also private lending programs in the US for foreign nationals that a mortgage broker can direct you to.
If you are not from the US, you probably don’t have a US Credit Score. Some Foreign investors will have international credit scores. Some countries require citizens to file taxes and some don’t. Some countries have English as their primary language and some don’t. If you are dealing with tax returns in a different language then the lender may need to hire a translator at a cost of $50 per page to translate the documents. Taxes work differently in every country, which is one reason foreign national loans are harder than conventional financing.
Foreign National Loan Terms
Slightly Higher Interest Rate
Foreign national loans usually have a 1% to 1.5% higher interest rate than normal loans. So if the average mortgage interest rate is 4% in the US, then expect to pay 5% to 5.5% on a foreign national loan.
Right now lending is loose, so down payments on Foreign nationals have dropped to 25% to 30%. I have seen this go up to 40% to 50% during tough economic times. In general, expect to put more money down.
In down years, only Adjustable Rate Loans Available
When the US is in a recession, lenders will only offer Adjustable rate loan programs to foreign nationals. The typical program would be a 5-year/ 7 year /10-year adjustable-rate with either interest only or amortized. Right now Foreign nationals can get fixed-rate financing.
Loan times are the same as Conventional Loans
The loan time for foreign national loans is the same as regular loans there isn’t any difference between the two. We are currently closing loans in 30 days in the US, but it can slow down to 45 days during recession years.
Borrow Paid Interest vs. Lender-Paid Interest
Borrowers have the choice between borrow paid interest and lender-paid interest for loans. For borrow paid interest the loan fees will be higher but the interest rate lower, whereas lender-paid interest, the loan fees will be lower but the interest rate will be higher. The typical rate on buyer paid interest is 1 point, which means 1% of the total loan as a fee. The interest rate will be 1% to 1.5% + the normal interest rate. If you choose lender-paid interest, there is no extra 1% fee but the interest rate will be about 1% higher, so add 2% to 2.5% to the normal interest rate.
Let’s look at an example so you can see the difference:
Let’s suppose you are buying $1,000,000 USA property. Current interest rates are 4%. You are putting 35% down payment which means $650,000 loan. The average us mortgage rate is 4%.
For Borrow Paid Interest, you would pay 1% of $650,000 as a fee- or $6,500 and the interest rate would be 5% – 5.5%
For Lender Paid Interest, there would be no fee but the interest rate would be 6% to 6.5%.
Prepayment Penalty for the first 2-3 years
A lot of foreign national loan programs will have a prepayment penalty for the first 2-3 years. This means that if you pay off the loan either by selling the property or refinancing that the bank will charge a prepayment penalty fee. The fee works on a sliding scale that goes down over time until there is no fee. If you had a 3 year prepayment penalty as a loan term and you sold in the 1st year the penalty might be equal to 5 or 6 months or mortgage payments, in year 2, 3-4 months of mortgage payment, and year 3- 1 – 2month payment.
Some Countries Excluded
For various reasons, some banks may not borrow to foreign nationals from certain countries and put them on an exclusion list. The main reason for this the country has an unstable government, but it can also be about money laundering or terrorism. If you live in a first world or 2nd world country this should not be an issue. Every bank has a different program so just because one bank says no, doesn’t mean a different one won’t, so I’d shop a little bit more if you get turned down once.
Will rate shopping for a mortgage hurt my credit score?
As a real estate agent, I frequently get asked by buyers if shopping for a mortgage will lower their credit score. The short answer is yes it does lower your score– but not by a lot, only 5 to 10 points total. Follow this link to see all of the different ranking factors that make up your credit score. Credit Inquiries factor in for only 10% of your total credit score, so payment history, debt levels, and credit history have a much more significant impact on your overall score. It is important to note that no one except FICOknows the exact algorithm for determining credit scores. Lenders I talk to say that for the first 3 Hard inquiries the credit bureaus are more lenient so you shouldn’t see a drastic change in credit score for the first 3 pulls.
The only time the small ding from credit inquiries will matter is if you are close to a cutoff for a slightly better interest rate. I think a lot of buyers over worry about too many hard inquiries affecting their score- we are talking at most 1/8 of a point difference in interest rate max- but if you are a first-time buyer stretching to get into your first home, I get it, getting the most out of your money and every dollar matters. Lenders will quote your interest rates based on your credit score, as well as other factors. I often get asked by buyers that they see a lower interest rate quoted online then the mortgage interest rate they were quoted by a lender. The reason is that the advertised internet interest rates are teaser rates- they advertise THE LOWEST possible interest rate to get people to click. Once you have a full quote run by the lender, unless you are an A++ borrower the rates will be higher than advertised, by as much as one whole point! In my experience, most lenders will be pretty close with Direct Lenders offering the slightly better rates but having stricter qualifying requirements (Better for W2 employees), and mortgage brokers having slightly higher interest rates but more flexible programs guidelines (Better for independent contractors, 1099 employees, and business owners).
There are two types of credit inquiries- Hard Inquiries and Soft Inquiries. When Lenders check your credit score it is always a hard inquiry (also called a “Hard Pull”) and will affect your score. When you check your credit yourself, either with credit karma or from your online bank account, that is a soft inquiry and has no effect on your credit score.
Unfortunately, in order for a lender to give you an accurate quote, they a required to do a hard pull of your credit. I recommend checking your credit score first before you start shopping for a mortgage so you know what your credit score is (When you check your own credit that is a soft pull and doesn’t affect your score). You can get a ballpark estimate from a lender by showing them the credit report you pulled before committing to having them do a hard pull. The lender requires your written permission to do a Hard Pull, so don’t worry if just talking to them will cause a Hard Pull.
I always advise clients to shop around when getting a mortgage because there are literally hundreds of mortgage programs out there and they vary greatly from program to program. I recommend getting at least 3 quotes. Remember when shopping for a mortgage to compare BOTH interest rates and mortgage fees for a true apple to apple comparison.
Obviously, you don’t want to cost yourself more money by overshopping and damaging your score. So don’t go overboard shopping.
Why do Credit Checks hurt my Credit Score?
Credit Bureaus understand that when financing a large purchase like a home, or a car, a student loan, or even applying for apartments- you may need to have more than one credit check. Creditors view borrowers getting their credit checked as an indication they are likely to borrow money in the near future. Borrowing money is not necessarily a bad thing on its own, it is how lenders make a living, especially if the borrow is creditworthy, but too many credit checks may indicate that the borrow is in financial difficulty and that they may not have enough money to pay their bills and could be a potential credit risk. Keep in mind when you borrow money your monthly payments go up.
How long does a hard Inquiry stay on my Credit Report?
The general consensus is about 2 years, however again, nobody knows for sure. I’d expect it to affect your score for a least 1 year but not much more than that- this isn’t the most important factor. If you have 6 or 8 hard pulls all in one kind of credit (like credit cards) in the last year that will obviously have a larger effect on your score than 1-3 pulls for different kinds of credit.
If my Score lowers 5 to 10 Points, How much will that affect the interest rate?
For mortgages, the minimum threshold used to be 680 but it has loosened up recently to 620. Once you get above 740 there is no impact from having a higher credit score on the interest rate. So remember how I said it is a good idea to check your credit score first? Let’s say you have 800- then it won’t really matter what you do, as 5-10 points will have little to no affect on your loan terms. Let’s take a different scenario, let’s say you were at 621. This would be a huge deal, as a 5 point drop could disqualify you from a mortgage altogether and you would need to be so so careful. There is about a 1% interest rate spread between A rating and C rating and each tier is more or less 1/8% percentage point difference. The example thresholds below where provided by Michael Abrams of RPM mortgage. Loan program interest rate thresholds will vary from loan program to loan program but this is a pretty representative example.
Conventional Financing Thresholds:
740 and above A+ Rating
720-739 A rating
700-719 A- rating
680-699 B+ rating
660-679 B rating
640-659 C+ rating
620-639 C- rating
A Lower Loan to Value ratio (LTV) can also lower interest rates. Let’s suppose you are 20% down with 640 credit score if you put down 30% or 40% that may drop the interest rate a few eights of a point because of the lower LTV ratio, so credit score is important but it is just one of the factors lenders considering when quoting an interest rate.
James Mortgage Shopping Tips
#1 – Shop Quickly, there is some debate on how long banks will consider multiple credits pulls as part of the same shopping event, but in general it is 14 days to 45 days with the consensus being 30 days. Make sure if you are getting multiple quotes to do it in a 30-day time frame to minimize credit score damage from hard pulls.
#2- Pull your credit yourself and send your report to lenders to give you a ballpark estimate over the phone before having a hard inquiry
#3- Get more than 1 quote
#4- Don’t excessive shop 4 quotes max
#5- Compare not only interest rates but also Loan Fees
#6- Organize and Save all of your mortgage application documents in one place so that applying more than once is easier and quicker
#7- Get a quote from your current bank, and ask friends family and real estate agents for referrals
A lot of first-time buyers want to know what kind of loan to get. I recommend 30-year fixed loans most of the time because the interest rate never changes- which means your mortgage payment never changes, and you reduce the principal balance and pay off the loan over time. Sometimes buyers can’t wait 30 years to pay off their house and want to pay it off quicker and choose a 15 year fixed loan. 15 year fixed loans offer slightly better interest rates but also have higher monthly payments.
I rarely recommend adjustable rate mortgages, or interest-only mortgages because these do have some downside risks. With adjustable-rate mortgages, your interest rate could go up and that means your monthly payment could go up as well. With interest-only loans, you don’t reduce principal so the loan balance doesn’t decrease over time lowering your leverage, increasing your equity, and ending mortgage payments after the loan is paid off.
Point or No Point Loans
With loan programs, you can usually have the option to choose between a “1 point loan” or “no point loan”.
What is a Loan Point?
A Loan point is a buyer closing cost paid in escrow. 1 point equals 1 percent of the loan amount.
For Example: Lets say you are buying a $600,000 house with 20% down. That means, in regards to home loans, you will have a loan amount of $480,000. 1 point or 1% of this amount would be $4,800. This $4,800 will be cash paid out of pocket by you the buyer before closing and will raise your closing cost.
Is Paying a point worth it?
Because paying a point will lower the interest rate for the life of the loan. Let’s say that the interest rate for no points is 4.25% and that by paying a point you can lower the interest rate by 1/8 of a percent or 0.125 so that the new rate would be 4.125% and that it’s the $480,000 loan we talked about above.
No Point Loan
1 Point Loan
Monthly Mortgage Payment
You can now calculate how long it will take for this point to pay for itself, by taking the cost of 1 point and dividing by the monthly savings. $4,800/$35 = 137 months or 11.5 years. In this example if the buyer were planning to stay in the property for 11 years this might make sense to do, otherwise, I would stick with no point home loans. Over 10 years 4.25% loan will pay $186,000 in interest while 4.125% will pay $180,000 in interest.
The problem nowadays with paying points is lenders aren’t giving very big discounts, if the discount for a point was ¼ or ½ a percent, that would be a lot more attractive for buyers. Another downside of buying a point is that it increases your closing costs rather significantly. You will have to decide for yourself.
How much do I qualify for?
The next thing that buyers want to find out is how much they can buy. There is a difference between what you qualify for versus what you are willing to spend.
For stated income loans that come in and out of the market, you can claim whatever income you want- although a lot of these buyers tend to get over their heads. A great example would be a salesperson in their first year who made 4K, 4K, 6K, and 14K in their first four months. They probably will assume from now on, they will always make 14K a month or more. If you get a loan payment that you can’t afford you will risk losing your down payment so be conservative if you are stating your finances.
For most of us, we will need documented income to qualify for a loan. This means the income that shows up on your taxes. The bank will look at your NET income, and not your gross. So lets suppose you own a small business, and you made $150,000 gross income, but then wrote off in your schedule C $140,000 in business expenses- that means your net income is $10,000 and that’s the income the lender is going to use to qualify you.
The bank takes an average of two years income. If your income increased they average it. So if you made $60,000 net income last year and $75,000 net income this year, they will give you $67,500 income. If your income decreased from this year to last year, the bank takes the lower income. Lets suppose you made $75,000 net income last year and $60,000 net income this year, they will give you $60,000 income.
How much can I borrow when it comes to home loans?
The mortgage amount you can qualify for is directly related to your net income. First, the bank will subtract any debt payments (for example a credit card payment or car payment) from your net income, then with what remains they will not loan more than a 35-40% debt to income ratio. If you are currently paying rent, and plan to live in the property as your primary residence then rent won’t be counted against you because they assume you will be living in your new home. If you are buying the property as an investment, your monthly living expense will also be subtracted from your net income.
Do you need help with home loans? Please call me directly at (310) 388-7332 or click the button below and I will be in touch.
Interest Rates fluctuate daily. Real estate sales take 30 days or longer on average to complete. A rate lock guarantees the final interest rate of your loan. I can tell you from experience, that buyers are extremely upset when their final interest rate is higher then what they were initially quoted. Buyers feel like they got the ‘bait and switch’ tactic and it can put a real damper on the sale.
How do you avoid this? Talk to your lender as soon as you open escrow and tell them you want to lock in your interest rate!
Lenders allow you to rate lock an interest rate for 30 days or 45 days. If the escrow takes longer than usual- a rate lock can be extended.
Rate Locks are not always Free! Lenders charge you a fraction of point added on to the interest rate to lock. For instance, if you are quoted 4.5% and you want to have a 45-day lock, then the charge for your 45-day lock might be 1/8 percent higher and the rate you lock is 4.65%.
Ever lender charges differently on rate lock so it is impossible for me to tell you exactly what they will charge. The longer the rate lock, the higher the risk to the lender that interest rates will go up and the higher charge. Here is a general idea of what you can expect on a rate lock:
15-day rate lock: 1/8 point lower than 30-day rate lock
30-day rate lock: The basis for all other pricing, origination fee only.
45-day rate lock: 1/8 percent higher on interest rate than the 30-day rate lock
60-day rate lock: 1/4 percent higher than the 30-day rate lock
If you go beyond your rate lock expiration you can purchase a 15 day or 30-day extension for an additional $300-$400.
Rate Locks work both ways. If the interest rate goes up you get to keep your locked rate, but if interest rates go down you can’t get the lower rate, you are stuck with what you locked. Sometimes the bank will give you the lower your rate but don’t count on it.
Buyers who believe that interest rates or going to drop sometimes decide not to lock in their interest rate- this is called “floating”. Floaters want to keep their options open. I never recommend to my clients to float because I have seen how quickly interest rates can swing in just one week, over 1/2% once!
Mortgage Brokers get more grief from rate locks than anything else- because although they can have an idea of what interest rates will do from experience, they have absolutely no control over it- so if the interest rate goes up while their client was floating or before they lock in the rate the client will be angry that they missed the good interest rate on their loan.
I always tell clients that you have to look at the big picture, the difference of an 1/8 or 1/4 of a point in interest rate is probably less than $100 a month on the payment so it’s not a total disaster. If rates go down substantially during your ownership, you can always refinance into the lower rate. I feel like a lot of the time the whole thing is blown out of proportion because buyers become obsessed with getting the lowest rate. The best thing to do is just lock the rate right away and don’t worry about it anymore.
Rate locks are given in writing. Make sure you get a copy of your rate lock from your lender in writing. If they tell you verbally they locked the rate but they don’t send it to you in writing, they may not have actually locked the rate but were going to, and then something came up and they got busy, then they forgot…. you get the point. Only when you have the rate lock in writing will you have the guaranteed rate.
Interest is the cost the borrower pays to the lender for the benefit of using the principal. Since real estate is very expensive in Los Angeles, current entry-level prices are about $500,000 to $600,000 and go up to 100M, the majority of transactions are with loans. Depending on the year you can expect loans to be anywhere from 60% – 80% of property transactions in Los Angeles (more cash purchases in down markets from investor activity, and more loan purchases in up markets from retail buyers). Interest rates fluctuate daily and move according to the global economy, the US economy, and the stock and bond market. Interest Rates are very hard to predict!
Fed Chair Paul Volker had the courage to raise interest rates to an unheard of 21.5% in 1981 to snap the US out of hyperinflation which was 15% in 1980 and dropped to 3% by 1983
Mortgage Brokers and Lenders always watch the 10-year treasury market and Fed Policy meetings for insights into the direction of interest rates. A good lender should be able to offer some insights to buyers about the current interest rates and where they are heading. The 10-Year Treasury index is basically the stock market’s prediction on where interest rates are going. Sometimes the market is right and sometimes the market is wrong. Even if the market doesn’t decide interest rates- the Fed does, it is good to know what the market thinks because the Fed certainly pays attention to people’s expectations. The Fed sets interest rates. Whoever is the current Fed Chair (Jerome Powell right now) has a huge influence on policy decisions. The fed has 10 members total so the Chair isn’t the only one who votes but they have the most influence. Right now we are in the midst of a rate-cutting cycle. The Fed’s dual mandate is maximum employment and stable prices (mainly this is inflation which they like to see at 2%). Adjusting the interest rate is one of their main tools for accepting the monetary policy. Some of their other tactics are Bond Buying, Money Creation (governments have fiat power to print money), and Credit creation (the fed sets the bank’s reserve ratios).
Interest rates are expressed as a percentage. The Interest Rates are currently near all-time lows with 30 years fixed at 3.5% interest rate. In 2019, The Fed has been keeping a close eye on the economy, the current trade war with China and global manufacturing slowdown have them worried of a potential economic downturn in the US. Unemployment is at an all time low at 3.5% and inflation is healthy at 2%, and GDP while slowing down from 4% in 2018 is still robust. The graph below was compiled from Historic 30 Year Fixed Rate Mortgage Data provided by FreddieMac.
If you are buying a residential property, get a fixed rate mortgage. With the interest rates at all time historic lows, there is no reason to get an ARM. In general it can be very risky to get an ARM because most peoples incomes are fixed, so when the payment adjusts and it is higher, they can no longer afford their home.
An Adjustable Rate Mortgage (ARM) is a loan with a fixed interest rate for a specified amount of time followed by a variable rate for the remaining period. The most common types of ARMs are for 5, 7, or 10 years.
For example, a 30-year loan with a 5/1 ARM means that you’ll pay a fixed interest rate for five years, then your rate will adjust each year after that for the next 25 years. The rate changes based on an index, such as the LIBOR (London Interbank Offered Rate) or COFI (Cost of Funds Index). These indices measure the cost of borrowing money. Most lenders will charge borrowers a rate based on an index plus a margin above this rate. This margin is usually expressed as the index LIBOR + 1%, or 2%, depending on the terms of the loan. ARMs also have “caps” which means there is a maximum amount that your rate can adjust upwards during the life of the loan (ARM caps are typically somewhere around 5%).
ARMs can make financial sense if the borrower is planning to own short term, or if the borrower believes rates will be lower in the future. However, buyers should Beware of adjustable rate mortgages. Unlike fixed rate mortgages, ARM’s monthly payments can go UP- and if you can no longer afford your monthly mortgage payment when it adjusts, you will be forced into selling or foreclosure. When a borrower gets behind on their payments it can be like a slippery slope, each month getting farther and farther behind.
Lenders write Preapproval letters for buyers. If you are planning to purchase a property with a loan you will need a preapproval letter to include with your offer. The preapproval letter is proof to the seller that you have the financial capacity to qualify for a loan to buy their property.
Citi bank preapproval letter example
Prospect Mortgage Preapproval Letter example
The preapproval letter is a 1-page document. It usually takes four to five days to get pre-approved. The lender will want a filled out loan application w/ social security numbers, driver license numbers, past two years of tax returns, W-2 forms, pay stubs, and credit report- a whole bunch of other documents that they request. Sometimes it can take a couple days just to dig all this information up. Lenders verify borrowers’ credit, income, employment and other assets. The faster you get the lender your documents, the quicker you will get preapproved.
My advice to buyers is to get your preapproval letter as soon as possible – that way if you find a property you like you will be ready to write an offer. It should be noted that it is possible to get an offer accepted without a preapproval letter (I have done it before), but it is very hard. If the property has multiple offers, forget it, the seller will put all the offers without preapproval letters and proof of funds in the trash.
Don’t let this be your offer, Get preapproved right away!
A great thing about getting preapproved for you as a buyer is that you will be able to talk with the lender. Your lender will be able to tell you how much you can afford, so you will know your maximum purchase price, and what your monthly payments will be. Sometimes it is better to spend less than the maximum price- I always say a 30 year fixed loan is 360 payments so make sure you are comfortable and not stretching too thin. For first time home buyers, you often have to stretch to buy your first property- so if you are stretching be willing to “rough it” for a few years as this sometimes just comes with the territory of buying your first home.
Pay off your 30-year fixed-rate mortgage in 15 years (Or any
Many buyers are torn when deciding between getting a 15-year or 30-year fixed-rate mortgage. I believe fixed-rate loans are the best choice for residential buyers unless you are only planning to be in the property for a couple of years, then an adjustable-rate or interest-only mortgage might be better. The 30-year has a lower monthly payment. The 15 year has a lower interest rate. According to Michael Abram of RPM Mortgage: “There is typically at least a 1/2%difference in the mortgage rates between the 15 and 30 (depending on fico score, property type, down payment amounts, etc.). I typically recommend 30 years fixed over 15 years fixed for my first-time home buyers, because they are unfamiliar with the expenses of owning a home in an expensive city like Los Angeles where the median home price is hovering around 700K. The lower monthly payment gives them more room if they go through a rough patch or just want to get comfortable making a regular payments to a bank without feeling like they are stretching themselves to a point of being house poor on a monthly basis.
Most buyers choose the 30-year fixed-rate mortgage for the lower monthly payment. If you are feeling comfortable in your financial situation there is nothing that says you can’t pay off your loan early. Unlike commercial loans which often times have prepayment penalties residential loans seldom have prepayment penalties- you might want to check to be sure if you are worried about it but I have never come across it personally.
If you want to pay off your loan early, I recommend going the making extra payments route rather than refinancing because every time you refinance you incur fees and you reset the clock on interest amortization. The only exception to this is if interest rates have gone way down- then the only thing that matters is the lower rate.
Back in the day, it was very complicated to figure out how to turn your 30-year note into a 15-year note. You had to take your pencil and scratch paper and getting really confused. Not the case today with modern online mortgage calculators ! Thank heavens for the internet.
Let’s take a quick look at a 30-year and 15-year comparison. This scenario is a $650,000 purchase price 150K down and a 3.4% interest rate on the 15 yr and 4.1% on the 30 yr.
As you can see, there is almost a $1,000/mo.! difference between the 15 year and 30 year. Turning your 30 year into a 15 isn’t cheap. In this scenario, it was an extra ~$24,000 each year to make the change. The good news is if you don’t have all of that money, you can pay whatever extra amount you are comfortable with as the extra payments are entirely optional.
The rule of thumb for calculating turning your 30 yr into a 15 is 2.5(x) your current monthly mortgage payment each year as an extra payment.
Any extra payment you make goes 100% towards the principal and speeds up your loan repayment timetable. If you fall short of the 2.5 each year or skip a few years, it might turn the 30 year into a 15 year, but each contribution speeds you up each year. 1 monthly extra payment each year turns a 30 year into a 25, and 2 extra payments each year makes it a 23.