Is a Shorter Amortization Period Right for You?

It’s sometimes difficult to understand how your mortgage payment is structured – that is, how much of the payment is interest and how much goes toward the principal to pay down the loan.

At the beginning of the mortgage process, you may receive an amortization table, which will show you how this is broken down for each payment.

As an example, if you have a $150,000 fixed rate mortgage for 30 years at 4%, your payments will be $716.12. In the first month, $500 of that will be interest and $216.12 will come off the principal. Your second payment is still $716.12, but you’ll pay less interest ($499.28) and more principal ($216.84).

The interest is about 70% of the total payment, but this will fall each month until it is near 0% at the end of the loan.

Comparison: 30-year versus 15-year mortgage

Now assume you have a fixed rate mortgage of $150,000 amortized over 15 years at 3.75%. (A loan with a 15-year amortization period likely will command a lower interest rate than one with a 30-year amortization period.) The monthly payment is $1,090.83, of which $622.08 will go toward the principal, and $468.75 to interest. While the payment is roughly one-and-a-half times that of the 30-year mortgage, the portion directed to principal is approximately three times that of the 30-year loan.

While a 15-year-mortgage may sound good, the monthly payment may be too high for you. In this situation, you can take a 30-year mortgage and make an additional payment toward the principal each month.

Over time, this may reduce the number of payments you make; every extra dollar you pay into the mortgage will reduce the amount you pay in interest on the remainder of the loan.

If you aren’t certain whether this approach is for you, discuss it with your mortgage professional. He or she can help you sort through your options.

Can I Still Refinance My Home through HARP

The Home Affordable Refinance Program (HARP) was implemented by the federal government in 2009. It’s still available to help underwater homeowners (those who owe more on their homes than the home is worth) and those who are near-underwater refinance their homes into a lower payment. However, HARP is set to end in September 2017. As rates have been trending upward lately, you may be interested in taking advantage of the program. If so, now is the time to explore your options.

To qualify for HARP:

  • Your mortgage must have been obtained through a Fannie Mae or Freddie Mac program lender, and you must have acquired it no later than May 31, 2009.
  • You can’t have had a late mortgage payment in the past six months, or more than one in the past 12 months.
  • The transaction, like all refinance transactions, must have a net tangible benefit to the borrower. It is not designed to keep homeowners out of foreclosure or to act as a loan modification program. For example, if you were going from an adjustable rate mortgage to one with a fixed rate, that would be considered of benefit to you. However, it would not be considered beneficial to you to refinance your mortgage at the same rate and pay fees to the lender in order to do it. In this instance, you wouldn’t qualify for HARP.

Is HARP for you? Discuss it with your mortgage professional, who can provide more details on the program and help you decide whether you qualify.