Mortgage News

Friday, March 02, 2007

Time to Get Rid of the "Pig" from Your Mortgages Back?


As you know, thousands of home buyers over the last few years have used a piggyback mortgage such as a 80/20 or 80/15.

Many of the second mortgages were based on an adjustable rate mortgage indexed on the ever increasing Prime rate.

Over the last 24 months, the prime rate has increased from 5.5% in Feb. of 05 to 8.25% currently. Many of the second mortgages are now fully-indexed at rates well over 10.00% with the first mortgages of 6.5% or higher.

Fully-Indexed?

If you have an adjustable rate mortgage you really need to understand what this means. Here is the calculation for fully-indexing a mortgage:

Index + Margin = Mortgage Rate
Index = Prime rate, Treasury Bill, LIBOR, etc
Margin = Arbitrage spread of the mortgage lender. Typically 2.5% - 7.5%.
Index (prime rate - 8.25%) + Margin (say 3.00%) = 11.25% Mortgage Rate.

For some, this may be an excellent opportunity to refinance considering that the effective "blended rate" of their first and second mortgages may be higher than the current mortgage rates of a single loan.

Blended rate is the actual monthly payment costs of both mortgage loans.

Here is an example assuming a $550,000 purchase using a 80/20 piggy back mortgage. View piggyback mortgage calculator.

First Loan: $440,000 at 6.5% = $2,781
Second Loan: $110,000 at 10.0% = $965

So assuming the current jumbo mortgage rate is 6.75% most people would not think of refinancing since the mortgage rate is .25% higher than they are currently paying. But here is why it's important to review your mortgage.

Using this blended rate mortgage calculator, you can see that combined (or blended) mortgage rate is actually: 7.20%

So if you can refinance your existing two mortgages which are 2 years old into a new single loan at say 6.7%, you would actually save .5% a year in mortgage interest on $550,000, which is $2,750 a year or $229 a month.

You would have a few options with this money.

A) You can deposit $229 a month into a savings account like hsbcdirect which is currently paying 6%. $229 a month will compound to a savings account of $16,286 in just 5 years, $37,945 over 10 years and $231,413 over 30 years.

B) You could get a 25 year loan at 6.75% and have monthly payments of $ 3,800 which is only $54 a month more but could save you a 36 months of $3,800 or $136,000 in future mortgage payments.

C) You could use the savings to pay down high rate credit cards.

D) You could support your Starbucks habit of two venti lattes a day.

E) Fund your kids piggy bank.

If you are currently in the above scenario, use the mortgage calculators indicated to determine if you should get rid of the pig and save some bacon.

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