By Quentin Fottrell
I am a 53-year-old single man with very little in savings. I paid off all my credit-card debt a couple of years ago. I have now decided to purchase a home. My rent has increased to the point where it is almost as much as a mortgage, and that is why I am purchasing a home. I am trying to pay off the mortgage as quickly as possible.
My credit-union credit card allows me to make a balance transfer at 0% financing with no fee once a year. It is a very high credit limit, and I was thinking of taking that and putting it on the mortgage as a way of paying off the mortgage sooner, rather than making extra payments every month to the mortgage company.
If I do it this way, I can pay off the card during the year, and save a lot of interest on the mortgage. My calculations for paying a weekly principal payment means the house could be paid off in less than seven years. I believe it would be a little better with making a large up-front payment. Just wanted to know your thoughts on this matter.
Here are my figures: a $260,000 mortgage over 30 years with monthly payments of $1,390 a month. If I pay an extra $2,500 a month, I can pay it off in about seven years. But paying $25,000 once a year may be a little faster.
Would-be Home Buyer
Dear Would-be Home Buyer,
First, let’s talk about your plan in principle: By taking out a 0% loan on your credit-union credit card for your downpayment, you are robbing Peter to pay Paul. But in this case, you are both Peter and Paul. I’m sorry to get all Dostoevsky on you , but you need to tread carefully, as you risk committing yourself to both a mortgage and a loan. If you fall behind on the latter, you will likely face hefty repayments when that 0% interest ends.
In practice, your bank in all likelihood (I can say with 99.999% certainty) won’t accept a credit-card payment as a down payment. Your financial institution wants to know that your credit and bank account is healthy. The down payment is a vote of confidence in that, and should come from your savings rather than your credit card. When you apply for a loan, the bank will also conduct a forensic examination of your finances before agreeing to a mortgage.
I’m not the only one to sound warning bells. “Dangerous Curves Ahead!” says David Waltzer, a New York-based bankruptcy lawyer. “What happens when you are late with just one payment, and that zero-interest rate jumps up to 18%? What happens when you have another rough period and can’t pay off the card on time? Even if you make all the payments perfectly on time, these credit-card companies do a regular review of your credit.”
Credit-card companies also have a lot of small print. “You plan to transfer a low-balance debt to another low-balance card. But what happens when that new low-interest offer never arrives? Now you are unable to make credit-card payments — and you will struggle with the mortgage as well,” Waltzer adds. “I have filed tens of thousands of bankruptcies in New York and New Jersey. Many of them were for people who tried to do what you are describing.”
David B. Rosenstrock, founder and director of Wharton Wealth Planning in New York, warns about the impact on your credit score. “According to myFICO.com, 30% of your FICO /zigman2/quotes/200175312/composite FICO +0.05% score is based on data that includes your utilization ratio,” he said. “Credit-utilization rate means the amount of your available credit that you are using at the time your score is calculated. You want to keep this utilization under 10% if your goal is to keep your score well into the 700s.”
What’s more, investing in a down market can also pay dividends, assuming you have time for shares to recover, and have the tolerance to withstand further falls. “A 30-year mortgage gives you 30 years to outperform your mortgage rate,” Rosenstrock said. “In general, you shouldn’t neglect retirement account contributions to pay off your mortgage on an advanced timeline. It is also important to always maintain an emergency reserve. Paying down your mortgage too fast at the expense of your emergency savings reserve can create problems if unanticipated events occur.”
Your base monthly repayments look slightly optimistic. Talk to a financial adviser about your goals, and your reason for becoming a homeowner. The big missing piece here is your salary and, to a lesser extent, the prospect of an inheritance. Please seek the advice of an adviser before jumping in. Lay your finances, your hopes and your dreams bare, especially where you would like to be when you reach retirement age, and whether you see yourself working beyond the traditional retirement age.
I fully support your wish to buy a home. Let’s say you work for another 15 to 20 years: You will not only have gained that equity in your home with your monthly mortgage payments, but your home will also presumably — or very likely — have risen in value over that time, giving you more options should you wish to cash out and move to a smaller home. With inflation and, hopefully, a higher salary, you may also find that your mortgage payments become manageable.
You’re 53. You don’t have to pay this loan off in seven years, and you don’t need to rack up extra debt. If your mortgage servicer allows it, paying off a regular amount on your mortgage — given that you are simultaneously paying off interest — can be more effective than an annual lump sum. For those who can afford to pay extra, both are a good idea as long as you ensure you have necessities such as an emergency fund.
“If the goal is to pay down the mortgage faster, ask your mortgage lender if you’re able to make additional principal-only payments and if there are any pre-payment penalties,” says J ennifer Weber, vice-president, financial planning at Weber Asset Management. “A principal-only payment would help save on interest and allow you to pay off your mortgage early. If allowed, you can increase your monthly payments or make larger annual lump-sum payments directly to the mortgage company.”
Waltzer is more circumspect on the benefits of home ownership than I am. He warns that your mortgage interest rate could also exceed 5% if you have a low credit score. “Home ownership costs are always more than expected,” he adds. “If you are purchasing a $260,000 house, I presume you will put 10% down ($26,000). But closing costs will be quite a bit more. So, you are probably looking closer to $40,000. Is that going to be wrapped into your mortgage?”
Greg McBride, chief financial analyst at Bankrate.com , adds, “Owning a home carries a lot of expenses beyond the regular monthly mortgage payment and it is those irregular, unplanned, and sometimes significant expenses that can undermine financial progress. The best antidote to that — and especially for someone who has had credit-card debt in the past — is to build up an emergency savings cushion. Without adequate emergency savings, even the best laid plans are one unplanned expense from failure.”
Lay out all of your options: 15 years vs. 30 years; the pros and cons of paying extra versus saving that money; insurance and property taxes; house repairs; closing costs; and potential bidding wars. The shorter the term — a 15-year mortgage rather than a 30-year mortgage — the lower the interest payment. Still, rates are rising: Monthly mortgage payments with a 30-year mortgage rate and a 20% down payment are roughly 50% more expensive than they were a year ago.
And, finally, the Moneyist is an optimist (most of the time): You may not be single forever.
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