It’s Mortgage Principal, Not Principle

Principal vs. Principle

  • Attention loan officers, mortgage brokers, real estate agents, and so on
  • The words “principal” and “principle” are two very different words
  • They are constantly used incorrectly by those working in the housing industry
  • Even by major mortgage companies and journalists that should know better!

Allow me to get testy about grammar for a minute (moment). I know I know, it’s lame to be a member of the grammar police and go after folks for using a word incorrectly.

I’m sure I use words incorrectly all the time.

In fact, maybe I should have used a synonym of incorrectly that second time around to mix things up.

But in this particular case, we’re talking about two completely different words that sound exactly the same but have entirely different meanings.

And they often get confused in the mortgage world, with the word “principle” typically used in place of the correct “principal.”

The scary part is that mortgage professionals and high-ranking journalists make this mistake all the time. Perhaps that’s why I have a bone to pick.

What Is Mortgage Principal?

principal vs principle

  • The word principal means first or primary
  • But it has a different meaning when it comes to money
  • It is defined as the original amount invested or loaned
  • In other words, it’s your loan amount if we’re talking about a mortgage

Well, the word principal generally means “first.” That’s why the head of a school is known as the principal, because they’re basically the one in charge (just watch out for the superintendent!).

When it comes to money, the word principal takes on a different meaning; the original amount invested or loaned.

So in the case of a mortgage, the principal balance would be the loan amount, which declines over time as it is paid off.

If you were to take out a $200,000 mortgage, that $200,000 would be the principal balance.

And each month you would make a payment with some portion going toward the principal and some going toward interest.

Assuming you’ve got an impound account, the payment would be split four ways with money also going toward taxes and homeowners insurance (there’s also PMI in some cases).

Now if the interest rate on our hypothetical, let’s say 30-year fixed mortgage, were 4%, the first payment would be $954.83.

Of that amount, $288.16 would go toward the principal balance, lowering it to $199,711.84. The rest of the payment, $666.67, would go toward interest.

Each month, the principal balance of the mortgage would fall, assuming fully-amortized payments, and not interest-only payments, were made.

For those who want to get a head start on paying down their mortgage, you can make an extra payment to principal, which means the excess amount goes toward principal once the interest is covered for the month.

So you can pay an extra $100 or $500 or round up your payment. Often you’ll need to tell the lender or loan servicer that you want the additional amount over your payment due to go toward principal so they know where to apply it.

The amount of equity you have in your home is the difference between your remaining principal balance and your current appraised value.

As a Matter of Principle

  • What about the word principle, which is often misused?
  • It’s something completely different that has nothing to do with mortgages
  • Defined as a rule or code that governs one’s behavior
  • For example, you might have principles to live by like always telling the truth

What about the word “principle?” Well, for starters it’s always a noun, whereas principal can be both a noun or an adjective (principal vs. principal balance).

It can mean a variety of different things, but perhaps the best definition is a rule (or code) that governs one’s behavior.

For example, someone might do something out of principle because it aligns with their moral beliefs. A vegetarian may not eat meat as a matter of principle.

Or someone may not do business with a large corporate bank out of principle because they disagree with their lending practices.

I suppose someone could decide not to pay their mortgage out of principle, or do something else money-related based on their principles, but that might be a stretch.

In the end, if you’re talking about your home loan, the word “principal” is likely the version of these very similar words you’re looking for.

Of course, in principle it may not matter, the bank will probably send your money to the right place even if you write “principle” on the check.

(photo: Roberta Romero)


It’s Okay to Rent Until You Find a House You Really Like

When deciding between renting and buying, individuals often fret about missing out on home equity if they do the former.

In other words, for all those years they choose to rent instead of own, they’re not gaining any sort of ownership, and their money is simply being thrown out the window.

Of course, that rent money is providing shelter and a roof over their head, so it’s hard to say it’s all for nothing.

And while the argument has some truth to it, it’s often blown out of proportion. Or skewed in favor of buying as opposed to renting.

Imagine if someone bought a home and prices went down. Would they still be talking about throwing away money on rent?

Has the Housing Market Gotten Ahead of Itself?

  • When things start to feel bubbly prospective home buyers seem to get even more desperate
  • This can lead to bad decisions, especially when it comes to a major purchase
  • Make sure you’re buying a property for the right reasons and not throwing out your own rules
  • It should never be a rushed decision or one in which you make too many sacrifices

Lately, there’s been a lot of talk about bubbles and a potential housing market crash. But home prices have only surged due to a lack of inventory, not because of bad mortgages.

The low mortgage rates on offer have also made the housing market hot, perhaps too hot.

And after some really stellar home price gains, they’ve begun to moderate a bit, or at least decelerate.

Now there’s even talk that home prices could pull back in places where appreciation got a little ahead of itself. Or a lot ahead of itself, depending on how you look at it.

So is it possible to rent for a while during this period of uncertainty and still come out ahead? Let’s break it down.

Buy Now, Even If Prices Drop

Say home prices in the area where you want to buy are hovering around $250,000. You pull the trigger and get your offer accepted, pledging to put down 20%, or $50,000.

That leaves you with a loan amount of $200,000. Let’s also assume your mortgage interest rate is 3% on a 30-year fixed-rate mortgage.

Your monthly mortgage payment would be around $843, not including property taxes and homeowners insurance.

After five years of on-time payments, your loan balance would fall to around $177,813.

Put another way, you would have paid roughly $22,187 toward the principal balance, which is one of the great benefits of owning a home. The accrual of home equity! Wealth building!

But what if home prices fall in the next couple of years, even slightly. Would it actually be better to rent for a couple years and then buy a property at a marginally lower price?

Rent Now, Buy a Home Later?

  • It’s perfectly okay to rent instead of own until you find a home that suits you
  • You’re not necessarily “throwing money away” despite what people always say
  • You could actually be saving yourself money and headache by renting
  • It’s certainly less stressful to rent than own (though it can be well worth it to own!)

Now let’s consider a scenario where you hold off on buying until things settle down, assuming they do.

Say you decide to rent for $1,000 a month for two years (around the same cost of the mortgage sans taxes/insurance), spending $24,000 during that time and earning nothing in the way of home equity, not to mention any tax breaks.

After two years, you find a house for $237,500 and decide to put 20% down. That leaves you with a $190,000 loan amount and a mortgage payment around $800.

Let’s assume you go with the same loan program (30-year fixed) as our prior example and get the same interest rate (3%).

After three years of holding the mortgage, you would only pay $12,266 toward your principal balance, but in doing so it would drop to $177,734.

This would actually be slightly below the balance of the aforementioned mortgage at that time, which began two years earlier.

So after five years, two years renting plus three years owning, you’d be ahead of the person who decided to purchase a home right away at a higher price.

After 10 years, the early buyer would have a principal balance of $152,039, compared to $144,437 for the renter-turned-buyer.

If we consider the down payment, $50,000 on the $250,000 home purchase and $47,500 on the $237,500 purchase, the renter is even more ahead.

And the late buyer would enjoy a monthly mortgage payment around $50 lower thanks to that five percent home price drop initially.

If they were to make the same monthly payment as the early buyer by putting that extra $40 toward principal each month, they’d actually pay off their mortgage in about 27.5 years, or 29.5 years counting the two years when they rented.

It’s Not About Timing the Market, It’s About Not Rushing In

Of course, my little scenario above banks on mortgage rates staying in place and home prices dropping about five percent. If both go up, the equation changes quite a bit.

And that’s certainly not out of the question. I still believe this housing rally has a few more years left, and with mortgage rates near record lows, there’s mostly only way to go from here.

Still, it’s okay to rent if you can’t find a suitable home to purchase. You won’t necessarily miss out on anything. And you can always make slightly higher mortgage payments to play catch up if need be.

There might also be a better selection of homes in a year or two, once this housing frenzy settles down again.

By waiting, you’re actually not timing the market. You’re taking your time and being prudent as you would any multi-hundred-thousand or million-dollar purchase.

After all, those who rush in often make mistakes, and may also have regrets. But with market conditions so tough right now, I don’t blame anyone for whatever decision they make.

Lastly, let’s also remember that a home purchase is about more than money.


What the Names Zillow, Redfin, and Trulia Mean

Nowadays, just about everyone looking to buy or sell real estate begins their search online.

And a small handful of websites seem to be dominating the home buying space, including oddly-named real estate tech companies.

I use these websites all the time when researching real estate, but never actually knew the details behind their names. So here goes.

Zillow Is a Play on the Word Zillion

  • The name Zillow is a made up word that is a combination of existing words
  • It relates to the zillions of data points used to come up with their famous Zestimate
  • And also happens to rhyme with the word pillow, which appears to the emotional side of homeownership

First up is Seattle, Washington-based Zillow, which got its start by offering free house values using an algorithm.

Before they came along, it was hard to know what your home was worth without getting an appraisal done.

As for their unique name, it rhymes with popular words like willow and pillow. And while willow trees are certainly homey, the word pillow is actually part of the name.

They note that a home is more than just data; it’s also a place to lay one’s head, hence the word pillow.

But primarily, Zillow is a play on the zillions of data points the company digests to come up with home values (Zestimates).

The company was founded back in 2005, and since then has become a major player in both the real estate realm and the mortgage world.

They have since launched Zillow Home Loans and are also an iBuyer of homes via their Zillow Offers subsidiary.

The publicly traded company’s stock is currently valued at a whopping $23 billion. Well done Zillow, well done.

Redfin Is an Empty Vessel, Among Other Things

  • While the name might evoke images of birds or fish, it’s actually an anagram and an empty vessel
  • If you shuffle the words around you can make the word friend or finder
  • But it seems the company just liked how it looked and sounded

Another growing superpower in the real estate space is Redfin, which has an even stranger name.

While the name sounds like a fish, species of shark, or some other deadly predator, it’s actually an anagram.

Yep, jumble the letters around and you come up with words like “finder” and “friend.” Taken together, you’ve got a friend to help you find your perfect home.

Back in 2004, company founder David Eraker noted that the name Redfin was also a “great empty vessel.”

By that, he ostensibly meant a rather arbitrary yet memorable and unique name that would eventually win the hearts of everyday consumers.

After all, empty vessels make the most noise, so if anything, it’s a talking point that may spark some initial curiosity.

Redfin is big in the real estate game, with perhaps the most up-to-date listings and tools like the Price Whisperer, and the Redfin Estimate.

It’s also getting involved in the mortgage sphere via its Redfin Mortgage entity, and is an actual real estate brokerage, unlike the others.

Like Zillow, they also got into the iBuying craze after launching RedfinNow, pitting them against arguably their biggest rival in just about every space.

The company went public in 2017, and is currently worth about $5 billion, considerably less than Zillow.

Trulia Means Truth

  • This company’s name actually has a historical context
  • It’s based on an old-timey first or last name that means “truth”
  • All large companies want to exude this virtue to their loyal customer base

Last on the list of weird real estate company names is Trulia, which sounds more like someone’s name than it does a company.

In fact, it is (or was) a baby name, albeit a rare one back in the day. It apparently means “truthful” or “trustworthy,” something the company founders wanted to exude.

I’m pretty sure the name was around before the company was, perhaps as a surname and maybe randomly as a first name.

The San Francisco-based company was founded back in 2005, and acquired by Zillow in 2015 for $2.5 billion in stock.

They’re pretty similar to their parent company Zillow, though they’re also big on the rental business and specialize in unique insights about neighborhoods, not just the properties themselves.

(photo: Jack Dorsey)


What Is Lender-Paid Mortgage Insurance? First Of All, You Still Pay For It

Mortgage Q&A: “What is lender-paid mortgage insurance?”

Several years back, a rule went into effect that made mortgage insurance permanent on most FHA loans for the entire life of the loan. Ouch!

Before this game-changer, FHA loans were the cat’s meow because of the low mortgage rates offered, coupled with mortgage insurance premiums that were not only more affordable, but removed once the loan amortized to 78% LTV.

But in an effort to reduce losses, the FHA ended its so-called easy money policies and clamped down on borrowers taking advantage of a program originally intended for the underserved.

As a result, borrowers began giving conventional loans a lot more attention, seeing that private mortgage insurance (PMI) automatically terminates at 78% LTV.

Homeowners with these types of loans can also request PMI removal at 80% LTV (based on original amortization schedule) or even sooner if the home appreciates in value.

And even better, there’s a thing called “lender-paid mortgage insurance” on conventional loans where borrowers don’t have to pay for their own coverage!

That certainly sounds too good to be true, but there is a catch.

Lender-Paid Mortgage Insurance Isn’t Free

lender paid mortgage insurance

  • The phrase “lender-paid” is somewhat deceiving/confusing (it’s not free coverage)
  • Your mortgage lender isn’t doing you a favor out of the goodness of their heart
  • The borrower still pays for this insurance coverage, just not directly out-of-pocket
  • Instead the lender will pay the premium on your behalf, which should increase your mortgage rate

When you see the term lender-paid mortgage insurance, your first impression might be that the mortgage lender pays for it, and you don’t. Hooray!

The reality is that the lender does indeed pay for the mortgage insurance (on your behalf), but so do you, in the form of a higher mortgage rate.

So instead of securing an interest rate of say 3.75% on your 30-year fixed, you agree to a rate of 4% with no mortgage insurance costs paid out-of-pocket.

This is similar to a no cost refinance, where the lender pays all the closing costs, but you wind up with a higher interest rate.

Simply put, while it sounds like you’re getting something for free with lender-paid mortgage insurance, it’s more about how you pay for this coverage.

Lender-Paid vs. Borrower-Paid Mortgage Insurance

Now let’s look at lender-paid (LPMI) vs. borrower-paid mortgage insurance (BPMI) to see how they stack up in the real world.

This is just one example to illustrate the difference, so do your own math with real numbers if and when it comes time to make this important decision.

Loan amount = $100,000
Loan-to-value ratio (LTV) = 90%
Monthly MI premium = $52

Veterans may qualify for a $0 down VA loan

Option A (Borrower-Paid Mortgage Insurance):

30-year fixed @3.75%
Monthly mortgage payment = $463.12 + $52 = $515.12

Option B (Lender-Paid Mortgage Insurance):

30-year fixed @4%
Monthly mortgage payment = $477.42 + $0 = $477.42

As you can see, the option with lender-paid mortgage insurance is actually cheaper in terms of total monthly payment, despite a higher mortgage rate.

This is the beauty of a long mortgage term – you can absorb upfront costs quite easily by paying them monthly instead.

However, the borrower-paid option will eventually become cheaper once the monthly mortgage insurance premium no longer needs to be paid.

But that would only be the case if you keep your home loan long enough to see that benefit.

Tip: How long you plan to keep the mortgage matters a lot when it comes to deciding between LPMI and BPMI.

Advantages of Lender-Paid Mortgage Insurance

  • You don’t pay mortgage insurance directly (no out-of-pocket costs)
  • May equate to a lower total monthly housing payment
  • May qualify for a slightly larger loan amount
  • Higher tax deduction possible if you itemize

One of the biggest advantages of LPMI is that you don’t have to pay mortgage insurance premiums.

As we saw from the example above, this can equate to a lower monthly mortgage payment in some cases, which is generally a good thing.

Of course, if you go with borrower-paid mortgage insurance (BPMI), your monthly mortgage payment will be lower once the mortgage insurance is no longer required.

So LPMI is generally only a money-saver if you don’t plan to stay in your home that long, or if think you may refinance sooner rather than later.

[Homeowners move every six years on average.]

If you elect to go with LPMI, you may also be able to qualify for a larger loan amount (or be able to purchase a more expensive home), seeing that the monthly payment can be lower.

A lower payment means a lower DTI ratio, which means you can get more loan for your income. While it may not be a huge difference, if things are close, the LPMI option could come in handy.

Another pro for LPMI is that there is the potential for a larger tax deduction, seeing that you’re paying a higher interest rate each month.

It’s a bit counterintuitive, but it should still be mentioned – this was especially pertinent before mortgage insurance premiums became tax deductible in 2007.

Tip: For those who earn more than $100,000 annually, the deductibility of mortgage insurance begins to diminish after that point, making the argument for LPMI even stronger.

Disadvantages of Lender-Paid Mortgage Insurance

  • You can’t cancel LPMI since it is built into your mortgage rate
  • Your mortgage rate will be higher as a result (maybe around .25% higher)
  • You will pay more interest to the mortgage lender over the full loan term
  • It’s non-refundable because it is paid for by your lender upfront

The clear disadvantage to LPMI is that it cannot be canceled, ever. Kind of like the mortgage insurance on most FHA loans nowadays.

Because LPMI is built into the interest rate, the “cost” is there forever, or at least until you sell your home or refinance the loan.

You don’t get to call your lender once your LTV hits 80% and ask or a refund or a lower interest rate.

And even if your monthly payment is lower to start, it will eventually be higher than the BPMI option, as we saw in our example.

Additionally, you’re stuck with a higher interest rate for the life of the loan, which means more interest must be paid to the lender.

Using the $100,000 loan amount example, you’re looking at an additional $5,148 in interest paid over the full 30 years. On a larger loan, it’s an even more significant cost to consider.

If you hold your mortgage for the full term, you will likely pay more with the LPMI option, even with the tax deduction factored in. Of course, how many people do that these days?

So that’s that – be sure to compare all mortgage insurance options with your mortgage broker or loan officer to determine what’s best for your personal situation.

Don’t just assume one is better than the other without actually doing the math and laying out a plan.

Read more: FHA loan vs. conventional loan


6 Ways to Snag a Low Mortgage Rate Even If They Suddenly Jump Higher

Over the past year, mortgage rates have been relatively steady near their all-time lows.

This has continued to benefit existing homeowners who wish to refinance their mortgages. And has exacerbated an already too-hot housing market.

But there has been increasing talk of rate increases, with the Fed eyeing a possible taper to its bond buying program.

If they do announce such a plan, it could lead to an interest rate spike, especially if the economy improves and COVID gets under control.

Of course, the jobs report released last Friday was very poor, with blame being tied to the more infectious Delta variant.

In short, reopenings and tourism/hospitality have been struggling once again as more folks stay at home.

However, if and when that does change, you need to be prepared. I’ve compiled a list of ways to keep your mortgage rate down if we do see another taper tantrum and mortgage rate fiasco.

Just Buy It Down by Paying Points

  • Want an even lower mortgage rate than what’s being offered?
  • Simply pay discount points at closing and you’ll get one
  • This is a surefire way to get your hands on a discounted rate
  • It’ll cost you a little more upfront, but your monthly payment will be lower for the life of the loan

One tried and true method to push your mortgage rate lower is to buy down the rate. Simply put, you pay interest upfront in the way of discount points for a lower rate long-term.

Yes, your closing costs will be higher, but your rate will be lower for the duration of your mortgage term.

If 30-year fixed rates rise, you might be able to buy the rate back down below 3%. Just be warned that chasing a certain psychological threshold might not make good financial sense.

For example, it may cost an arm and a leg to get a rate below 3%, but very little to get the rate to 3.125% or 3.25%. And the difference in monthly payment could be negligible.

Lower Your LTV to Improve Pricing

  • Another trick is to come in with a larger down payment on a home purchase
  • Or pay down your mortgage balance a bit before refinancing
  • This could help you avoid some unnecessary pricing adjustments
  • Which means you’ll actually qualify or those low advertised interest rates

Another way you can bring that mortgage rate down is by lowering your loan-to-value ratio. This means either putting more money down on a home purchase or borrowing less for a refinance.

So instead of going with 10% down, maybe see what rates are like with a 20% down payment, assuming you can handle the cash outlay.

Or when refinancing a mortgage, maybe bring money to the table or avoid cash out to keep the interest rate at bay.

A lower LTV equates to fewer pricing adjustments, which means you can qualify for the lowest rates available with a given lender.

Improve Your Credit Before You Apply

  • Work on your credit scores months before applying for a home loan
  • Even simple things like paying down credit cards can help
  • Or simply avoiding new lines of credit in the lead up to your application
  • This will ensure you qualify for the lowest mortgage rates possible

While you’re at it, you might want to see if you can spruce up your credit. A low credit score will increase your mortgage rate, sometimes significantly.

If you’re able to improve your scores before applying for a mortgage, you should qualify for a lower interest rate.

Simple things you can do include paying down credit card balances and avoiding new lines of credit. Also avoiding new charges on your credit cards will help lower your credit utilization.

It might take some time for these moves to reflect in your scores, so take action early. But if you need the changes to apply immediately, ask your loan officer about a rapid rescore.

Go with an ARM Instead of the 30-Year Fixed

  • If fixed mortgage rates are too high check out alternatives
  • It’s OK to look beyond the default 30-year fixed-rate mortgage
  • There are hybrid ARMs that offer a fixed rate for 5-7 years or longer
  • These could be a good alternative if you don’t plan on staying in the property for long

There’s also the ARM option. If you feel fixed mortgage rates have risen too much, you can expand your horizons and look at adjustable-rate mortgages.

There are plenty of hybrid-ARM options that offer a fixed-rate period for five, seven, or even the first 10 years of the mortgage.

Most people move or refinance before that time anyway, so it’s worth at least considering an ARM if you can handle the potentially higher rate once it resets.

You will enjoy lower monthly payments during the initial fixed period and pay down the mortgage faster thanks to a lower rate.

When the rate is close to resetting, you can refinance again, sell the property, pay it off, etc.

Yes, there’s risk here, but it’s one option to at least consider.

Shop Your Mortgage Rate More

  • Here’s a no-brainer that most consumers fail to do
  • Just shop around at more than one bank or lender to improve your rate
  • Many borrowers obtain just one quote, which sounds cliché but is sadly true
  • Put in a little more time and you’ll increase your chances of saving money on your mortgage

If and when mortgage rates move higher, you’ll need to be a lot more picky when it comes to lender selection.

At the moment, you can’t really go wrong (to some extent). But if rates worsen, you better pay a lot more attention to what’s going on and shop accordingly.

Not all lenders react to the market the same way, so the spreads can widen significantly from mortgage company to mortgage company.

Some may have increased rates more than necessary out of an abundance of caution, while others may still be offering aggressive pricing to bring in customers and stay competitive.

It could pay to get a few quotes just to see what’s out there.

Just Wait It Out for Better

  • If mortgage rates aren’t favorable, wait for the trend to become your friend
  • Rates constantly change direction throughout the year as news happens
  • There are often periods of strength and weakness (don’t panic!)
  • Simply timing your application could be enough to get the rate you want

Lastly, you could just pump the brakes and wait for the dust to settle. We humans have a tendency to panic and buy when we should sell, and vice versa.

If the stock market tanks, folks often hit the “sell” button when it could actually be beneficial to buy at a discount.

Similarly, it might be prudent to wait if mortgage rates jump, as they often reverse course once news is digested.

There’s still plenty of uncertainty out there, and uncertain times usually call for volatility, which is often accompanied by lower interest rates.

This isn’t a sure thing, but it’s also not a sure thing that mortgage rates will continue to stay put at their low, low levels.

The good news is you always have options if things take a turn for the worse.

Read more: 21 Things That Can Make Your Mortgage Rate Higher


Should You Drive Until You Qualify for a Mortgage?

In the mortgage/real estate world there’s a saying: “Drive until you qualify.”

It’s a cute way of saying if you can’t afford a home in a certain (desirable) area, hop on the highway and keep driving until home prices get more affordable.

This could mean driving an hour away from where you work, an obvious negative for someone who has to commute five days a week, especially if traffic is a bear.

This was common during the previous housing boom, with home builders often buying up cheap land in the outskirts of towns to construct their massive new tracts.

Because inventory was either non-existent, or simply out of price range, prospective home buyers would opt to buy in far-out places instead.

We’re beginning to see this phenomenon again thanks to dwindling inventory and higher and higher home prices.

It might explain why prospective buyers are beginning to look where they may not have initially looked for a home.

The difference today is that the work office environment has changed, partially due to COVID-19. In short, you might be able to work from home.

Homes Tends to Get Cheaper the Farther You Drive

  • There’s a good chance home prices are out of your budget in desirable areas
  • As such you might want to consider additional areas further outside your target zone
  • While sometimes frowned upon, the suburbs offer lots of advantages and are back en vogue
  • Benefits include more living space, outdoor features, and better schools (good for families)

The housing market is highly competitive at the moment. Anyone who has thought about buying a home knows that.

Today’s market consists of bidding wars, sky-high home prices, and lots of desperate home buyers. And despite some seasonal slowing, relief doesn’t appear near.

If you’ve been looking and it’s just not happening in your target area, you may want to broaden your search.

Not only are homes cheaper outside of city centers, they also tend to be newer, bigger, and sometimes nicer than the properties in the center of town.

Yes, location, location, location is still king in real estate, and always will be.

But while it can be fun to be closer to the action, the tradeoff might be a cheaper home with a lot more features. What’s not to like, other than the drive?

The Outskirts Can Get Hit Harder During a Downturn

One issue with the outskirts, other than the commute, is the potential for a big drop in property values.

It just so happens that new communities in the outskirts got hammered during the housing crisis because they often attracted the same type of buyer.

Someone who couldn’t afford a home in the city at peak prices and thus had to buy in the burbs or beyond, while still stretching their finances to qualify for a mortgage using the builder’s lender.

Before long, many homeowners in these tracts were underwater because they all bought at or near the height of the market, often with zero down financing and an adjustable-rate mortgage.

In other words, the crop of borrowers in these areas tends to be higher-risk compared with the more affluent borrowers living in the city.

So while that home in the exurbs may appear to be a bargain, there’s a reason aside from the location alone; the heightened risk during a downturn.

Major cities are insulated and constantly in demand, even if the economy takes a hit because many jobs are located in city centers.

It’s also more difficult to build new units. The same can’t be said about a random suburb that was only created to increase affordable housing inventory.

One should also factor in transportation costs to determine if it’s more affordable to buy outside of town. We all know gas isn’t cheap, even if it fluctuates in price.

Potential transportation costs (and perhaps opportunity cost while commuting) should factor in to the price you pay for a home.

The good news is electric vehicles are becoming more common as is remote work.

If You Have to Drive to Buy a Home, Should You Just Wait?

  • You might want to reconsider your home purchase if you can’t afford real estate at today’s prices
  • Sometimes it better to wait and get what you really want than settle and still pay a hefty price tag
  • There will always be ebbs and flows and opportunities in the future (prices won’t go up indefinitely)
  • And you won’t want to be stuck with a home in a faraway place you don’t even like

Let’s forget all the number crunching and just consider the climate at the moment.

If you have to drive to someplace you had no intention of living in, do you think it’s the right time to buy a home?

I’m not just referring to the suburbs vs. the city because there are plenty of great reasons to live in the burbs, as mentioned.

I’m referring to places further out than you intended, which were perhaps only brought to your attention by your real estate agent.

Are home prices maybe just a tad too high? Is it more beneficial to pump the brakes and keep renting where you enjoy living and wait for a better opportunity to get in?

As mentioned, home buyers got burned during the previous bust when they purchased homes in the outskirts.

I don’t see why it would be much different this time around, assuming there’s another major downturn.

This is especially if you’re buying out there for the same reason as everyone else, affordability.

It tells me home prices are getting a little too elevated, and many of your new neighbors will be in the same boat.

The silver lining is everyone will probably have a boring old fixed-rate mortgage, as opposed to a risky option arm, which could limit the damage.

But if you and the rest of your neighbors have a 3% down mortgage, it won’t take much for the first domino to fall.


Are Mortgage Calculators Accurate? Why Some Totally Miss the Mark

Time for more mortgage Q&A: “Are mortgage calculators accurate?”

Just about anyone looking to buy real estate or apply for a mortgage refinance will rely upon a loan calculator to get a better understanding of what their monthly payment might be.

But not all mortgage calculators are created equal – in fact, some totally miss the mark.

For that reason, it’s important to understand what you’re actually calculating to ensure you get the numbers right. Or at least close to right…

The More Stuff That’s Included, the Better…

Let’s start with the basics. Any mortgage calculator worth its salt should let you calculate principal, interest, taxes, insurance, and even include PMI and HOA dues.

Why?  Because these are all very real costs, and ignoring them means underestimating what you’ll owe each month.

If it simply shows you principal and interest, you’re missing a pretty decent chunk of the payment, assuming your mortgage has impounds (which many do).

Or if you’re buying a condo (and will be subject to HOA dues) or put less than 20% down and didn’t opt for LPMI.

I know that many mortgage calculators often ignore some of these costs, or automatically assume they don’t apply to your situation. This can end up being misleading.

I conducted a little research on Google by looking up the first few mortgage calculators that came up in their search.

Mortgage Calculator Results Definitely May Vary

  • Not all mortgage calculators are created equal
  • In fact, many don’t include very important components of the overall payment
  • Such as homeowners insurance, property taxes, and mortgage insurance
  • These items can potentially double the monthly housing payment in some cases

The first result, which was from a generic mortgage calculator website, asked for a home value, a loan amount, an interest rate, loan term, and start date. It also assumed a 1.25% property tax rate and 0.5% for PMI.

My issue with this calculator is that it assumes the user knows a thing or two about mortgages, which just isn’t the reality.

Many people don’t know the first thing about mortgages, and most certainly don’t know what PMI is. Or if it costs 0.5% of the loan amount.

The PMI thing is a problem because borrowers may not actually have to pay it, so including it by default can throw the numbers off in a hurry.

Strangely, when I changed the PMI value, the monthly payment output from the calculator was the same because this calculator doesn’t actually add it to your payment.

It simply displays the monthly cost of the PMI in the details below the total payment.

My guess is most users probably won’t see that, or take the time to add the two numbers up to see what their true monthly payment might be with PMI included.

Homeowners insurance is also ignored here, which is mandatory for all mortgagors, so the chances of this calculator being accurate are slim to none.

It might give you a decent ballpark, depending on your loan and LTV, but people shouldn’t use calculators to get rough estimates.

Zillow’s Mortgage Calculator Includes Everything


  • Look at the difference in monthly payments once everything is included
  • The image on the left is simply the principal and interest payment (mortgage only)
  • While the image on the right is the full housing payment including insurance, taxes, HOA dues, etc.
  • Make sure the calculator you use provides the complete picture to avoid any surprises

Next up in the search results was Zillow’s mortgage calculator, which included property taxes and homeowners insurance by default. To me this one was already superior because it included the full PITI mortgage payment.

One slight difference was that they calculated property taxes at a rather low 0.75%, as opposed to 1.25%. While it seems like no big deal, it could easily make or break a borrower.

Their homeowners insurance estimate seemed fairly accurate for me, in California, but I know other states, like Texas, have much higher rates. So again, the numbers can get thrown off pretty quickly here as well.

However, their calculator was much more intuitive with regard to PMI. If you entered in a 20% or higher down payment, it simply ignored PMI. If you put anything lower, it calculated it at around a half a percent, but also adjusted it based on loan amount and down payment.

Still, actual numbers can and will vary, so these are just estimates once again. Also, you might not have to pay PMI, even if putting down less than 20%, so it doesn’t always apply.

In the screenshots posted above, the first image is from Zillow’s calculator with only principal and interest accounted for.

The second image to the right shows the same monthly payment with taxes, insurance, PMI, and HOA dues included. Once all costs are factored in the monthly payment is nearly 50% higher.

So yes, it’s very important to consider and calculate all potential costs, and to utilize a calculator that gives you the option to include them all.

The third result, which was a loan calculator from Bankrate, simply provided the principal and interest payment. Really bare bones.

This is fine if you don’t have impounds and pay insurance and property taxes on your own, but otherwise it greatly diminishes what you’ll actually have to pay each month, as illustrated above.

It also ignores the possibility of PMI and HOA dues, both of which could be costly expenditures to ignore.

By the way, none of these calculators are geared toward FHA loans, which come with both upfront and monthly mortgage insurance premiums that will completely change the picture.

So if you’re going with the FHA, use a calculator designed for FHA loans.

Zillow’s Mortgage Calculator Might Underestimate Some Costs


All in all, I felt that Zillow’s calculator was the most thorough in that it included all the costs you might incur as a homeowner, though it did leave plenty of room for error if used incorrectly.

Additionally, I should point out that the estimated mortgage payments you’ll find toward the top of individual listing pages on Zillow (click on the star icon directly below the images) seem to be off when it comes to taxes and insurance, and as such, what you would expect to pay each month as a homeowner.

They always greatly underestimate the cost, and I have no idea why. Well, I can think of one reason.

But if you scroll down to the bottom of the listing page you should see a more accurate number that is pulled directly from the county assessor’s office in the “Price and tax history” section.

Remember, if you’re serious about determining what you can afford, don’t just use a loan calculator, get the actual numbers from the source to see where you stand. Even seemingly minor miscalculations can sink your mortgage.

For the record, many of the lower-end calculators or advertisements you see on TV or elsewhere will typically display the lowest monthly payment possible, typically just principal and interest, whether accurate or not. So take those with a huge grain of salt, or the entire shaker!

The same is true of mortgage solicitations you might receive in the mail, which often display the P&I payment only to entice you.

Redfin’s Mortgage Calculator Is My Favorite

Redfin calculator

  • The Redfin mortgage calculator seems to be a solid choice
  • I found that it provided a more accurate estimate of taxes and insurance
  • And it pulls HOA dues from the property listing page into the calculator automatically
  • But it’s not perfect because they may lowball mortgage rates in some cases

I recently revisited this post and wanted to add the Redfin Mortgage calculator to the mix.

I’ve always felt that Redfin had more up-to-date and accurate property listing information relative to other real estate websites.

They seem to factor in recent home sales more quickly than Zillow, which leads to more accurate estimated home values.

And it appears that their loan calculator is also more on point. For example, I ran one home purchase scenario through both Zillow and Redfin and the results were night and day.

On a hypothetical $999,000 home purchase with a 10% down payment, Redfin came up with a total payment of $6,204 per month, while Zillow had a monthly payment of just $5,511.

That’s a difference of roughly $700. Not small potatoes by any means.

Again, the culprit was property taxes and homeowners insurance, which were both way underestimated by Zillow.

Additionally, Redfin automatically pulled HOA dues from the property listing and inputted them into their calculator.

While still not perfect, largely because they seem to lowball mortgage rates, it still feels like the best option out there at the moment from the big players.

To summarize, make sure the mortgage calculator you use includes everything you expect to pay each month, and bases it on a reasonable mortgage rate estimate.

For the record, I’ve created a variety of mortgage calculators using Excel, and there are also several web-based calculators you can use from the drop-down menu to the left, including an early mortgage payoff calculator.

Read more: How are mortgages calculated (lots of math)?


Why It’s Best to Apply for a Mortgage When Things Are Slow

A working paper from the National Bureau of Economic Research revealed that it might be best to apply for a mortgage when no one else is.

The analysis, “The Time-Varying Price of Financial Intermediation in the Mortgage Market” (if you like light reading you should check it out), found that price changes on the secondary mortgage market aren’t fully passed on to consumers if volume is high.

In other words, if lenders are busy, they aren’t offering their lowest mortgage rates. In a sense, this is somewhat ironic, in an Alanis Morissette kind of way.

Savings Aren’t Passed Along When Demand Is Strong

  • When demand for a certain product, such as a home loan, is particularly strong
  • There is less (or no) incentive for lenders to pass along even more savings
  • This is similar to how retailers won’t lower prices if they’ve got plenty of buyers
  • Why should they if they’re already slammed?

The researchers refer to this cost as “intermediation,” which they define as the middleman between the borrower and the purchaser of the loan (the investor), essentially the lender.

This intermediary buys the mortgage from the borrower and then sells it to an investor. They provide the principal balance to the borrower and offer a rebate, otherwise known as a lender credit.

The rebate can cover closing costs associated with the loan so the borrower doesn’t have to pay them out of pocket.

Conversely, the borrower can take less or none of this rebate (or even a negative rebate) and instead go with a lower mortgage rate to save money over time.

Higher Rates on Days When Mortgage Applications Are Up

In any case, there is a rebate associated with each mortgage rate on a mortgage ratesheet that spells out whether the loan will provide the borrower with funds to cover their costs, or instead cost them at closing.

What the researchers found out was that mortgage lenders were passing along less of this money to borrowers on days when mortgage applications were high.

For example, on the day before QE1 on March 24th, 2008, there were only 35,000 daily mortgage applications, which is historically quite low.

As such, there was plenty of capacity to take on new mortgages, and thus when mortgage rates moved lower most of the improved cost was sent along to borrowers.

In other words, because volume had been so low, mortgage lenders were more eager to lure in customers, so they passed along more of the rebate to prospective customers.

Your Mortgage Rate Might Be Higher If Demand Is Also High

  • Mortgage rates might be higher if demand for home loans is also elevated
  • Ultimately lenders have limited capacity to deal with an influx of applications
  • And as noted, less incentive to lower interest rates if they’re already receiving a ton of business
  • It might be worth your while to pay attention to the MBA’s weekly mortgage application index

When QE1 was later expanded on March 18, 2009, the number of daily applications went from 60,000 the previous day to 100,000 following the announcement. This time, the pass-through to borrowers was lower because lenders already had their hands full.

This also tells us that there are diminishing returns to monetary policy. If the Fed kept trying to stimulate the mortgage market, lenders would have to pump the brakes to ensure they had the capacity to underwrite the loans and do their job.

There also just isn’t much incentive to keep lowering prices (rates) if demand is super high. What’s the point if the phone is already ringing off the hook?

Lenders also don’t like to bring on more staff for short-lived events, especially if rates rise and demand cools off in a short period of time, which it did on several occasions over the past few years.

Mortgage rates are highly volatile, and can change from day to day and even daily.

Maybe There Could Have Been a 2% 30-Year Fixed Earlier

  • During the mortgage boom years between 2009 and 2014, mortgage rates hit record lows
  • But is it possible they could have been even lower at that time?
  • Low enough that some lucky homeowners may have received 30-year fixed rates in the 2% range?
  • Rates have since drifted to record lows but it seems they’re often held back

The researchers also found that the price of intermediation rose steadily from 2009 to 2014, a price increase that amounted to 30 basis points per year.

They pinned the rise on a decrease in the valuation of mortgage servicing rights, thanks to higher legal and regulatory costs, and revised capital requirements.

This, along with the sensitivity to loan volume, resulted in a total cost of roughly $135 billion to borrowers over that time period.

Put another way, when mortgage rates hit record lows, it’s possible they could have been even lower had lenders actually passed on more of the price improvements from the secondary market, which they typically do.

Instead, they kept more for themselves, either for profit and/or to address the lower value of mortgage servicing rights.

That meant borrowers could have potentially received a 30-year fixed in the high 2% range when rates bottomed, instead of say 3.25%.

What Time of Year Is Best to Apply for a Mortgage?

That brings us to the next logical question. Is there a better and worse time to apply for a mortgage throughout the year?

This isn’t totally clear. Ultimately, mortgage rates ebb and flow and can be driven by completely unique events each year.

For example, no one probably foresaw COVID-19 tanking mortgage rates. However, I did do my own research and found that mortgage rates are lowest in December.

And guess what? They’re highest in April, which just so happens to be the traditional peak of the home buying season!

It turns out those sneaky lenders might be on to something…

So maybe, just maybe, you’re better off applying for a mortgage when no one else. Aside from perhaps getting a better deal, you could also receive more attention and close your loan a lot quicker.


Resetting the Clock When You Refinance

Mortgage rates are trickling back toward record lows again and refinance applications are on the rise.

You can thank our questionable economy, a COVID resurgence, and the Fed’s pledge to continue buying mortgage-backed securities.

The recent announcement regarding the end of the Adverse Market Refinance Fee is also undoubtedly helping.

My expectation is we’ll see a big jump in refinance applications when the Mortgage Bankers Association (MBA) reports the data tomorrow morning.

While the rally could be short-lived, it may renew interest for some that were on the fence about refinancing, especially if their current interest rate isn’t all that high compared to current market rates.

What Does It Mean to Reset the Mortgage Clock?

reset mortgage

Mortgage term: 30 years
Age of mortgage: 5 years old
Time left on mortgage: 25 years

When you refinance your mortgage, there are plenty of implications. It’s not just about a lower monthly payment, despite that being shoved down your throat.

There’s also the cost and time involved, the product you choose, the status of your existing mortgage, along with what you plan to do post-refinance.

One thing some homeowners might overlook when refinancing is their mortgage term, seeing that most individuals tend to focus on monthly payments above all else.

But when you refinance, you wind up with a new loan term and associated amortization schedule.

So if you previously had a 30-year mortgage that was five years old, and refinanced into another 30-year mortgage, your term would increase from 25 years back to 30 years.

A 35-Year Fixed Mortgage?

In this fairly reasonable scenario, a hypothetical homeowner would increase their collective loan term to 35 years as opposed to 30.

This matters. It matters because the longer you take to pay off a loan, the more it will cost you in the way of interest. This is one reason why 40-year loans aren’t very popular and all but extinct nowadays.

Sure, your monthly payment will be lower on a longer-term mortgage, but you’ll pay a lot more interest and build home equity much more slowly.

So for those that refinance into a mortgage with the same term as the original mortgage, the clock is effectively reset. You’re back at square one, at least in terms of when your mortgage will be paid off.

Even if your payments are lower, you’ll still have to make another 360 payments (in the case of a 30-year loan) before you own your home free and clear, assuming you don’t pay it off early or refinance again.

Now the mortgage term isn’t the be-all and end-all because homeowners refinance for plenty of different reasons, but it is something you need to strongly consider.

Let’s Do Some Math to Illustrate This Clock Resetting Business

Original mortgage: $200,000 loan, 30-year fixed @6%
New mortgage: $186,000 loan, 30-year fixed @4.25%

Suppose a borrower has a $200,000 mortgage set at 6% on a 30-year fixed mortgage. They make regular monthly payments that push the loan balance down to roughly $186,000 after five years (60 months).

Then they decide to refinance into another 30-year fixed set at 4.25%, which lowers their monthly payment from $1,199.10 to $915.01, factoring in the slightly smaller loan amount of $186,000.

The monthly savings are nearly $300, which is great for payment relief, but if they hold the new loan to term, they’ll pay roughly $142,000 in interest.

Keep in mind that during the first five years on the original loan they paid about $58,000 in interest. That needs to be factored into the total equation as well.

In reality, this borrower will pay about $200,000 in interest when you consider the full 35 years of monthly payments.

However, had the borrower not refinanced, they would have paid about $232,000 in interest on the original loan. So there are still decent savings to be had, even when restarting the clock.

However, that was a near 2% drop in rate. What if it’s a lot less than that?

If our hypothetical borrower had an original interest rate of 5.25% instead of 6%, total interest paid over 30 years would be roughly $198,000.

After five years, they’d pay about $51,000 in interest, with a loan balance down to around $184,000.

If they refinanced to a 30-year fixed at 4.25%, they’d pay another $142,000 in interest over 30 years, or about $193,000 in total across the two loans. That’s only $6,000 less than the original loan had it been left alone.

Once you factor in refinance costs, assuming it’s not a no cost refinance, the savings could be negligible.

You Can Reset the Mortgage and Still Win

The obvious answer to this “problem” is to simply refinance into a shorter-term mortgage, such as a 15-year fixed mortgage.

That way your effective mortgage term is actually 20 years; five from the original loan plus 15 more via the refinance.

Throw in a lower interest rate (15-year fixed mortgages are cheaper) and the savings will be substantial.

We’re talking close to $100,000 less in interest paid. Not to mention you own your home a lot quicker.

But that involves a higher monthly payment, something not all homeowners are particularly fond of, especially when refinances are sold as payment relief.

After all, some borrowers just want to reduce monthly costs and put money elsewhere, such as in a retirement account or other investments that yield better returns.

There are also homeowners refinancing out of ARMs and into fixed mortgages, which resets the clock but puts the borrower into a loan they know will not adjust higher.

Look at billionaires like Facebook founder Mark Zuckerberg, who kept refinancing from ARM to ARM to save money. Sure, he can pay off his mortgage whenever he wants, but he’s still resetting the clock over and over again.

Other Options to Avoid Resetting the Clock

If you want to a lower interest rate on your mortgage, but also want to stay on track payoff-wise, you’ve got some other options.

One trick is to refinance from a 30-year loan into another 30-year loan at a lower rate, but continue to make your old monthly payment.

For example, if you were paying $1,200 per month and your new minimum payment is $900, keep paying $1,200.

This could save you a good amount in interest and shed years off your mortgage, making the combined term of both loans less than 30 years.

You also get to enjoy payment flexibility versus the more expensive 15-year fixed.

It may also be possible to obtain a more obscure type of loan, such as a 20-year fixed or maybe even a 25-year fixed instead.

And there are lenders out there that will let you choose any mortgage term you wish. So if you’re already six years into a 30-year term, they can give you a new 24-year fixed mortgage.

In summary, consider your loan term when you ponder a refinance. If you’re well into paying off your mortgage, there’s less incentive to refinance and reset the clock.

Remember, interest is front-loaded on mortgages. How much have you already paid and how much will you save with a new loan?

If it’s early days, you shouldn’t fret too much, but if you’re far along, take a moment to really run the numbers.


Why Are Mortgage Payments Mostly Interest?

Mortgage Q&A: “Why are mortgage payments mostly interest?”

Here’s an interesting mortgage question – pun sadly intended because I couldn’t help it.

Lots of folks are obsessed with how much interest is paid on a mortgage, often citing the total interest paid over 30 years.

This counters the argument that mortgages are the cheapest debt you can own, which they basically are.

Let’s discuss what they’re getting at to see what all the fuss is about.

Payment Composition Over Time

  • Most homeowners tend to take out fixed-rate mortgages
  • The monthly payments on these types of loans don’t change during the full 15- or 30-year terms
  • But while the mortgage payment remains constant throughout the life of the loan
  • The amount that is allocated to principal and interest changes monthly as the loan is paid off

The way mortgages are set up here in the United States, each monthly payment is the same amount, assuming it’s a fully amortizing fixed-rate mortgage, which most tend to be.

The payment amount after month one is the same as it is during month 360, assuming you take out a 30-year fixed and keep it until maturity.

This makes housing payments more affordable (and predictable) because the balance is paid off evenly over a long period of time, such as 30 years.

However, even though the payment amount is fixed, the composition of the payment will change monthly until the loan term ends.

Let’s take a look at an example to illustrate:

Loan type: 30-year fixed mortgage
Loan amount: $200,000
Mortgage interest rate: 4%

In this common scenario, the monthly mortgage payment would be $954.83 for 360 months in a row. Ouch. That’s a long time.

Each month, the borrower would need to make the same payment to their lender or loan servicer in order to satisfy the entire balance in 30 years.

The amount would never change, though as mentioned, the composition would. In fact, it would change every single month during the loan term.

How Much Goes Where Each Month?

amor 1

  • During the early years of a home loan most of the payment goes toward interest
  • This is the result of a large outstanding balance at the outset of the loan
  • Over time more money shifts toward principal as the loan balance shrinks
  • Unfortunately, most borrowers don’t keep their loans long enough to see this happen

As you can see from this image of the amortization schedule, the first monthly mortgage payment consists of $288.16 in principal and $666.67 in interest.

In short, the first payment on a mortgage is “mostly interest.” In fact, interest accounts for nearly 70% of the first payment. Boohoo.

In the second month, the total payment amount is still $954.83, but the composition of the payment changes slightly.

The principal portion increases to $289.12, while the interest portion drops to $665.71.

Why is this? Well, remember the first month’s principal payment of $288.16? That lowered the outstanding principal balance from $200,000 to $199,711.84.

As a result, the interest due on the second monthly payment dropped, and the principal increased, because as noted earlier, the payment amount stays constant.

Over time, this trend continues. The principal portion of the monthly mortgage payment increases while the interest portion drops.

It’s pretty minimal in the beginning because little principal is paid each month with such a large balance demanding so much interest each month.

This is the “front loaded” argument you hear about – how interest makes up the lion’s share of early payments. It’s not a gimmick, just the way math works.

Principal Surpasses Interest!

amor 2

  • It takes nearly half the loan term for principal payments to exceed interest payments
  • But once this finally happens payments become very principal-heavy
  • This means more of your dollars are actually going toward paying off your home loan
  • And in a few short years the loan balance is paid down pretty fast

In month 153, or nearly 13 years into a 30-year mortgage, the principal portion of the mortgage payment finally surpasses the interest portion.

As seen in the screenshot above, the principal portion of the monthly payment is $477.88, while the interest portion is $476.95, which still equals the original payment amount of $954.83.

Interestingly, the outstanding loan balance remains a hefty $142,608.40, or 71% of the original balance.

It’s not until month 231, or nearly 20 years into the loan term, that the outstanding balance falls below $100,000, or less than half of the original loan amount.

In other words, the bank still very much owns your home, even though you think you’re the king or queen of your castle.

However, this is where the principal really starts to get paid down, as interest finally takes a back seat.

Barely Any Interest Is Paid During the Final Year of the Loan

amor 3

During the final year of the loan term, each monthly payment is more than 96% principal, with very little interest due because the outstanding balance is so low.

A small outstanding balance coupled with a low mortgage rate means associated interest will be pretty insignificant, as seen in the image above.

We’re talking $37 bucks one month, $19 in another, and just over $3 in the final month!

Assuming the loan is paid off in full, as scheduled, a borrower would pay a total of $343,739.21, of which $143,739.21 would be interest.

So it’s not mostly interest, rather, it’s mostly principal.

The Real World Scenario

  • Most homeowners sell their homes or refinance in less than 10 years
  • For these borrowers their cumulative payments will be mostly interest
  • But technically you should pay more principal than interest on a home loan
  • You just need to hold it for a very long period of time to see that happen

In reality, many homeowners don’t hold their mortgages for the full term. In fact, most are said to hold their loans for a fraction of the loan term, such as seven or eight years.

That’s right – plenty of borrowers refinance, pay off the mortgage earlier, or simply sell their home and move on to another mortgage.

So it’s kind of misleading to look at mortgages as if they’re going to last the full term. But it’s for this very reason that mortgage payments tend to be mostly interest.

Because many borrowers never get to the point where the principal actually surpasses the interest.

When borrowers do refinance, critics will argue that they’re “resetting the clock,” which refers to extending the loan term and starting the process all over again.

For example, if you paid down your existing 30-year loan for 10 years, then refinanced into another 30-year loan, you’d extend the length of your mortgage.

Same loan amount, but longer time period to pay it off, even if your mortgage rate is lower.

As a result, your balance would be paid off over 40 years, as opposed to 30. That’s 10 years from the first loan and 30 years for the refinance loan, meaning it could result in more interest paid.

Again, most borrowers don’t hold their loans that long, so again this fear is overstated and sometimes not even relevant.

However, if you are deep into a 30-year mortgage and looking to take advantage of a lower mortgage rate, consider a shorter term as well, such as a 20-year or 15-year mortgage.

That way you’ll avoid paying extra interest and stay on track to be free and clear on your home as originally intended, assuming that’s your intention.

Read more: Should I Prepay the Mortgage or Invest Instead?