Jack M. Guttentag The Mortgage Professor

whitefox - Thursday, July 2, 2009, 1:10PM ET  Report Abuse

• Overall: 3/5

No matter what your decision might be, do not use Quicken Loans for a refinance. They are a Predatory Lender that quotes you one rate in the beginning and then makes you wait while changing the rate, points and terms. There are lots more reputable mortgage brokers than this company.

Yahoo! Finance User - Thursday, July 2, 2009, 2:22AM ET  Report Abuse

• Overall: 1/5

should we fold our hands and pray during an earthquake?....or get under the table and cover our heads while saying a prayer?....it depends on your interest and life span i guess

Jeremy - Wednesday, July 1, 2009, 10:41PM ET  Report Abuse

• Overall: 2/5

A house is a hedge against inflation. Real inflation over the next few years will be high. Buy or refi a house at a 15 year 5% note. Overpay every month a little to get ahead of it. Save and invest your money wisely. Put your money where it will beat inflation, not against your hedged shelter. Only borrow for 30 years on property that will produce such as industrial or agricultue. If this seems difficult you are living beyond your means. Dont buy the lie that a house and a home are the same thing.

Yahoo! Finance User - Wednesday, July 1, 2009, 7:03PM ET  Report Abuse

• Overall: 2/5

Refi/Early mortgage payoff is a very complex financial equation. It can not be solved by a simple article. It requires hundreds of posts to resolve and answer the age old question. To pay or not to pay. That is the question

Stephanie - Wednesday, July 1, 2009, 3:31PM ET  Report Abuse

• Overall: 3/5

Every person's situation is different, but I am a big proponent of getting rid of debt. I made triple payments on my house when I made the income to afford it, and it was paid off in 2006. I'm happy to say that now, at age 60, I don't owe a dime to anyone. It gives me great peace of mind, especially since I got laid off last February.

__A_YAHOO_USER__ - Wednesday, July 1, 2009, 1:34PM ET  Report Abuse

• Overall: 1/5

Poorly written as usual Jack. You could have shortened the article to two words: "It depends." Questions worth considering necessarily include: What is one's anticipated duration of ownership? Few choose to remain in the same home for even 15 years, much less 30 years. How does including additional principal payment affect the borrowers liquidity?

Gicster - Wednesday, July 1, 2009, 10:34AM ET  Report Abuse

• Overall: 2/5

I have been looking at this issue for months and still keep weighing options. I am 6 yrs in mortgage but sitting at 17 yr mark to pay it off. A refi was $3-4K and the savings over time was $20K, however that was if I paid normally, if I pay ahead after refi it became harder to determine. Also I figured that the $3-4K was worth about $7 - $9k in savings over the life of the loan and interest (if I paid it down today. However, that is a lot to put down. Basically if the 15 yr goes to 4.5 again (crossing my fingers) I will refi and otherwise I will just pay ahead. Article was fair but hoping for more insight.

Christian M - Wednesday, July 1, 2009, 4:49AM ET  Report Abuse

• Overall: 4/5

Excellent article! And to those who think the model doesn't work, you probably didn't use it correctly...it works perfectly!!

teraflop - Tuesday, June 30, 2009, 6:54PM ET  Report Abuse

• Overall: 5/5

Excellent article. Having made extra payments and re-financed in the past, I feel very qualified to agree and comment. As Jack says, it depends on the motivation. I re-financed to get a lower rate *and* a lower P&I amount, yes, knowing it extended the loan out but I always make extra payments anyways. To me the lower P&I amount (the payment) gave me an option, the higher discretionary income (cash) allowed me to either plow the $ into equity or something else. That being said, I opt for extra payments, both throughout the year, bigger lump-sums at the end of the year, as well as whenever you get a winfall. You can probably tell my motivation: get out of debt. Thanks for your article.

John W - Tuesday, June 30, 2009, 1:33PM ET  Report Abuse

• Overall: 1/5

Incredibly simplistic evaluation. To me, the most important factor is what year the mortgage is in. If you're in year 5, very little goes to principal so there is a higher chance a refi is a good idea. If you're in year 20, much more goes to principal, and you might not recoup the cost of a refi if you intend to amortize the remainder of the loan at the original schedule (take 10 years to pay the remainder instead of 15 or 30). Other than switching to a 15, there is no closing costs discount for going with a shorter loan, since banks spend just as much with a $75k loan as they do with a $750k loan.

Allan - Tuesday, June 30, 2009, 12:40PM ET  Report Abuse

• Overall: 3/5

There are too many variables to consider in the matter to give a fixed answer. The author answered in a general manner because it really depends on each individual person and their financial situtaion. A person building retirement (not touching it until then) would want to invest extra money rather than pay down the mortgage because they could be guarnteed a better return (ie.7% with Prudentials HD7 annuity) than the mortgage rate. Plus they get the mortgage interest tax benefit by having the mortgage. A different situation would require a different solution, where paying extra to the mortgage could be more benefial. It just depends on each individual.

Yahoo! Finance User - Tuesday, June 30, 2009, 11:40AM ET  Report Abuse

• Overall: 2/5

Why are they asking the questions? Assuming the objective of either extra payments or refinancing is to pay off the mortgage as quickly as possible, then you can ignore all the static about ROI, taxes etc. Refinancing has more traps than extra payments. Is there a prepayment penalty? What are the other bank and legal costs? If you have a 30 year mortgage and it is now year 5, if you refinance, make sure you get a 25 or shorter mortgage. Are you refinancing and keeping the same or larger payment? You should. Don't refinance if you think that you might move in the next 5 years as any benefits probably will not be achieved. Don't think of your house as an investment but aim to be mortgage free as soon as possible so that you can use this "free" money to save for retirement or to pay for children's education. I think Jack's last paragraph says it all. Make the refinance decision first considering if it makes financial sense in the short and long term. Then throw as much extra money as you can at the mortgage. We had paid off our mortgage before the eldest kid finished high school and no-one really seemed to go without, provided you accept that you keep your cars for 12 to 15 years etc. Then you have no foreclosure risk and you can handle the ups and downs of this economy without too much stress.

Yahoo! Finance User - Tuesday, June 30, 2009, 10:56AM ET  Report Abuse

• Overall: 1/5

Very poor column. These decisions should not necessarily be made separately. First of all, the author completely ignores the remaining length of the loan and amortization schedules. If you have paid for 10 years into a 30 year mortgage, would it really be wise to refinance to another 30 year mortgage to reduce your rate and payments by 1/2%? No way. You have already paid off a good part of your interest and are now paying off quite a bit of principal with each payment. It would only make sense to refinance to a 20 year mortgage with a lower rate. Amortization tables show the entire amount to be paid (total principal and interest for each loan). You should review these and take into consideration the total cost. Your mortgage goal should be to build equity as quickly as you can afford, not just to reduce your monthly payment. The later is exactly the type of mentality that contributed to the mortgage mess that we are now in. As for return on investment, even with a super low mortgage rate of 5.25%, what other investment can you think of that guarantees a 5.25% rate of return (making extra payments) with no ADDITIONAL risk. I emphasize "additional" because you have already purchased the house. Making additional payments adds no more risk, since you already owe the mortgage. There are many more factors, so you should consult a professional, but the worst columns II have read emphasize lowering payments rather than building equity.

Doug M - Monday, June 29, 2009, 9:43PM ET  Report Abuse

• Overall: 2/5

Not a bad article, gratefully does not try to convince people that the tax advantage from deducting a mortgage (if you itemize) outweighs other factors. It does not. If you can get a guaranteed earning at a rate higher than paying down your mortgage with extra principle payments then do not prepay. The key is guaranteed returns, not hypothetical or potential earnings. One other factor is "behaviour". If you can prepay your mortgage and then pay it off, you must also maintain that same discipline and save/invest the monthly amount in your IRA, portfolio or other investment. Paying off your mortgage is simply getting out of debt. The real goal is being debt free and with significant savings.

Yahoo! Finance User - Monday, June 29, 2009, 9:39PM ET  Report Abuse

• Overall: 1/5

This article does not provide any great insight. Do what is right for you is hardly earth shattering insight.

Polish Gypsy - Monday, June 29, 2009, 8:34PM ET  Report Abuse

• Overall: 2/5

I think the underlying question most people have when they ask "refinance or make extra payments" is really, "which one will result in the quickest path to paying off the mortgage". Perhaps the author could expand on that line of thinking with an example or two (since it the answer changes depending on a number of variables he has already mentioned.

Slipin - Monday, June 29, 2009, 8:03PM ET  Report Abuse

• Overall: 1/5

The Author NEVER produced a loan in his life because he sits behind a Desk as a Ad-Junk Professor of Stupidity. When he's not doing that, he's a lobbyest for the Bankers, or writes Books about finance to confuse Americans.

Baby boomer - Monday, June 29, 2009, 6:01PM ET  Report Abuse

• Overall: 2/5

Jack, adopt the KISS principle (Keep it simple, Stupid.) As you are looking at an either / or situation, then goals of reducing annual payments or raising cash from a re-financing shouldn't be considered. One must look at keeping the total annual payments the same with the objective of paying off the mortgage ASAP. Keep the two questions separate as there are almost too many variables for the average person who is working not in a financial institution. Jack, you have omitted the income tax effects. Mortgage payments are tax deductible whereas interest in your investments are taxable. Watch out for hidden extras (bank or legal) when refinancing or changes in your mortgage terms as raised in earlier comments. Considering all costs, which option lets you pay off your mortgage earliest with the same annual payment? Then do that.

wgaf - Monday, June 29, 2009, 4:49PM ET  Report Abuse

• Overall: 3/5

poorly explained, although it is not a simple topic, this question is better expalined in a spreadsheet with a variety of examples. Unfortunately there are enough variables such as inflation and alternative investments that only in hindsight can we easily determine the best course, however in extreme cases such as very high interest rates or interest only loans, can the decisison be fairly clear at present.

KentG - Monday, June 29, 2009, 4:14PM ET  Report Abuse

• Overall: 2/5

There is a huge additional component to take into consideration, especially in the economic environment we find ourselves in today, and it definitely favors re-financing. In my financial planning practice I have witnessed several couples of late who have found themselves in the following predicament: 1. Owning a home with tons of equity, even in today's depressed real estate market. 2. They have been paying down their mortgages with extra principal payments regularly. 3. They had inadequate cash reserves in their financial plan (or rather, lack of one). 4. One or both of the wage-earners in the family has lost their job. 5. They now have the tragic scenario of having an almost paid for home with no income to continue the remaining mortgage payments. Not too common, but nonetheless a v ery real possibility for many today. In the re-fi process make sure that you have kept a nice chunk of change (amount varies with each individual situation) so as to be able to outlast a job loss scenario. Stay liquid. You'll never regret it. Having the liquid assets available to pay down a mortgage can be far more valuable than paying extra on the principal balance, not in every situation but in many. After all, what would you rather have, minimal debt and no home or some additional debt, lots of free cash and some forms of security? And, oh yes, a lower interest rate.

Yahoo! Finance User - Monday, June 29, 2009, 3:36PM ET  Report Abuse

• Overall: 2/5

Not only do you have the interest deduction in taxes, but the time-value of money. If you pay $200 extra now on a loan with 20 years remaining, you are effectively paying with dollars from the year 2029. At 3%/yr inflation, something that costs $200 today will cost $360 in 20 years. I'd rather pay the $200 then.

Yahoo! Finance User - Monday, June 29, 2009, 3:29PM ET  Report Abuse

• Overall: 3/5

A refinance *can* shorter the term of your loan if you take advantage of the benfits (lower payments). In 2003 I refinanced a 15-year loan at 6.75 % to an ARM that kept the interest rate at 3.75% for the first five years. Even though my required payment dropped about 800 bucks per month in the fall of 2003, I kept making the same [higher] payment (plus an additional 25 bucks a month) that I was used to paying at the old rate of 6.75%. I paid off my mortgage when the rate adjusted last fall (lower as it turned out because my loan rate was tied to the 1 yr T-bill). Some people advised me to invest the 800 bucks a month I was saving after the refiance. However, although mine was a very conservative approach, based on the market meltdown of the last year and a half, I feel that, for me, that was the best way to go because I am sure any money I might have invested over the past five years (in anything) would have surely been lost - - or the value of the investments I'd have gotten into would (at a minimum) be worth less than what they were worth when I got in. I am using the drop in the value of my 401k as the basis for making that statement. And on top of all that, after factoring in the cost of the refinance, I still saved over 7000 in interest over the life of the loan.

PassionNotSmudge - Monday, June 29, 2009, 3:22PM ET  Report Abuse

• Overall: 4/5

This article is a good starting point to thinking through the proper investment decision. I think a scenario-based approach to calculating the best moves are in order. It's not enough to look at APR's on the web (since mortgage companies mislead potential refinancers about the real cost associated with refinancing). The first thing a home-owner should consider: (1) is it about cash flow (i.e. can you make the payment?) or (2) about return on investment (a tall order anyhow, considering we haven't confirmed a housing bottom, just yet, but long-term, we should be ok.). (1) If it's about cash flow, then refinancing is a no-brainer, but you have to do the due diligence to make sure banks don't try to hook you into a refi package with lots of hidden costs; the ROI becomes a bit less relevant in the case of just being able to make a payment. (2) In the case of investment, scenarios for refinancing need to be lined up with extra payment to compare return based on an assumed home sale or refinancing at a future date (to the authors point). The caveat to the future refinancing is that we can't assume interest rates will stay low. Another item, outside of comparing investment in CD's, is to consider the impact of inflation, which is sure to have an impact in the long-term. If inflation kicks in, next year, what would be the impact to salaries, home prices, and money locked into the invested home equity? This is tough to predict, but relevant; my wager is on home prices staying flat/not rising with inflation due to buyer response to the downturn, dollars being worth less but inflated, and salaries going up; if I'm betting right, then real estate investment is irrelevant and probably not the right investment to make (keep just making that payment or refi to bring the payment down). Historically, betting on the right equity stocks has been the best hedge against inflation and safest investment (I'm not an equities broker, but gold is often over-invested during the inflationary period; commodities are too risky; bonds are an obvious mistake as rates go up; holding onto cash - outside of the safety net savings - is a bad investment when stocks are going up and also prices). For those who contest that we will see inflation, we should looks at history and Buffet's opinion - he's been right more than once in the past. Printing money is guaranteed to have an impact, regarding of consumer behavior. Let's just hope that jobs are created by the time the inflation hits (probably next year), because the last thing we need is a stagflation similar to what happened in the 70's. On a macroscopic note, kudo's to the government for stabilizing the banking system - what a mess we'd be in had we not done that. I just hope, if China becomes the powerhouse that the US has been since WWII in the financial world, that they make the same decisions that we have to promote a global economy and don't take a protectionist view, because if they don't, we are going to be hosed! It's not like they are buying our goods and services the way we buy theirs, today - hence, the imbalance; the same holds true for India, what's the value put on the intellectual capital we've freely given away? - but, yet I digress. To bring it all home, I'm not too worried about the investment in my home, but rather can I make a payment in the future - a bit of a glum view to have to take, relative to where I was a couple of years ago!

Yahoo! Finance User - Monday, June 29, 2009, 3:14PM ET  Report Abuse

• Overall: 1/5

I think substantiated evidence would prove some of your points. I will say that 100% of your mortgage interest is NOT 100% deductible to the user who added that comment earlier. Disclaimer: consult your tax expert. And to anyone who really wants to beat the banks focus on the term and not the payment. Yes, 15 years is better than thirty, but you can calculate the rate of payoff via many different calculators online. Run the numbers and then decide whether refinancing is the answer. Again, real numbers are more convincing than this less-than-moving article. (i.e. at 19 years and 4 months into a 5% fixed mortgage you finally pay more principle than interest)

Yahoo! Finance User - Monday, June 29, 2009, 2:45PM ET  Report Abuse

• Overall: 1/5

"The principal motivation for making extra payments seems to be to get out of debt faster, and the refinance won't change that." What? A refinance can absolutely change that. Refinance for a shorter term... 30 yrs to 15 yrs.

Stephen - Monday, June 29, 2009, 2:40PM ET  Report Abuse

• Overall: 4/5

It is suggested that if you invest your extra payment into CDs or bonds instead of against the mortgage balance, you want to make sure your investments outperform the interest rate on the mortgage. Welll put, but don't forget the tax deductions! If you are in the 33% tax bracket (average american), you get to deduct all the interest you paid on your mortgage at that rate, effectively making your 6% mortgage a 4% mortgage after deductions. This makes investing your "extra payments" a lot more attractive. It's much easier to gain upwards of 4% than upwards of 6%! Good article!

Yahoo! Finance User - Monday, June 29, 2009, 1:56PM ET  Report Abuse

• Overall: 3/5

Just a pet peeve... Mute: Not speaking: unwilling or unable to speak. Moot: Not relevant: irrelevant or unimportant.

Randall - Monday, June 29, 2009, 1:39PM ET  Report Abuse

• Overall: 4/5

Jack's first good article. In future articles you may want to describe that in real life with most people it is typically not an either or choice of investing versus extra mortgage principle, especially on small to medium increases in a monthly amount. It would probably be true in a lump sum payoff scenario though. Not bad! Good logic at the end though - I agree.

Yahoo! Finance User - Monday, June 29, 2009, 1:00PM ET  Report Abuse

• Overall: 2/5

Although Jack does not clearly reveal the complexities of this decision, some responses appear to unwittingly take a simplistic view of such choices. Jack may have started by first saying you need to determine your objective - lowering your payment or paying off debt earlier. Although there are so many variables to consider. For example, I recently spent hours figuring what percentage rate we'd need to refinance at in order to save any money. We paid an extra $200/month toward our principal for the first 4-5 years on our current mortgage. Because of that, we will pay it off 3 years early. To save money by refinancing and have it paid off on the same date as our original loan, we would need to refinance at a rate 1.75% less than we have now. With that, we would pay $40 less/month and save $3,000 in the 7 years until it is paid off. I doubt we'll ever get back to a rate of 4%, so it's now a mute point, but it illustrates the complexities in weighing the pros and cons of various senarios regarding refinancing versus paying more each month.

Yahoo! Finance User - Monday, June 29, 2009, 12:38PM ET  Report Abuse

• Overall: 5/5

Very thoughtful and informative article! Thanks for sharing.