When is it Smart to Refinance into a Shorter-Term Mortgage in Colorado?

Recent data reflects that Colorado homeowner’s are abandoning their 30-year fixed mortgage loans and opting to refinance into a shorter-term mortgage loans at a pace not seen for nearly 8 years.

Last quarter 43% of U.S. homeowners refinanced out of their 30-year mortgage loan, in favor of a shorter-term mortgage loan, equating to 2 our of every 5 refinancing households, carrying an existing 30-year fixed mortgage loan, refinanced out of their 30-year mortgage loan, and into a 20-year or 15-year fixed rate mortgage loan.

Of course, the biggest reason for this shift has been the continued availability of low mortgage interest rates, and when comparing a 30-year mortgage loan with a 15-year mortgage loan, a homeowner will pay an average of 65% less in interest on the 15-year option vs. the 30-year option.  Per the chart below, one can see the rise in 15-year mortgage loans vs. 30-year mortgage loans.

Although paying 65% less in interest is the main reason many homeowner’s are opting to trade in their 30-year mortgage for a shorter-term mortgage loan, the more compelling and emotional reasoning is the excitement homeowner’s feel when thinking about how they could very well own their home free-and-clear of any mortgage loan in a shorter amount of time, and this goal seems quite attainable when interest rates continue to remain this low.

However, as with any option, there are downsides of opting for a shorter-term mortgage loan, and the downsides of a 20-year or 15-year mortgage loan deserve some attention.  Although the goal to own one’s home free-and-clear of any mortgage debt should be admired, it’s important to consider the possible strain a higher mortgage payment could place on one’s personal balance sheet, as well as their monthly budget.  Personally I’m not a big fan of using shorter-term mortgage loans for a three main reasons:

  • First is the fact that in many instances you can accelerate a 30-year mortgage and pay it off sooner without incurring the costs of refinancing, by simply making higher monthly and/or annual principal pre-payments yourself.  Many times this is a safer option than refinancing into a shorter-term mortgage loan and committing oneself to the higher payment, because overpaying your existing 30-year mortgage gives you the option to fall back on the already scheduled 30-year payment, especially if it is for some unexpected minor or major financial emergency.  This isn’t possible with a 15-year or 20-year mortgage, since the monthly payment must be made no matter what.
  • Second is the fact that any principal pre-payments go to building up home-equity.  While building up home-equity is not a bad thing, one must remember that home-equity fails the two (2) most important tests when it comes to smart financial planning.  What is the rate-of-return? How “liquid” is the account?  Remember, home-equity does not provide any rate-of-return, and home-equity is barely “liquid”, if at all.  The only way to “liquate” home-equity is by borrowing against it, or selling the home to turn the home-equity into useable cash, of which both of these options carry costs.  So when it comes to applying prudent and sound financial planning practices to your home-equity, you should be thinking twice about becoming too aggressive when building up home-equity with principal pre-payments.
  • Third is the fact that overpaying your mortgage and accelerating your mortgage debt may not be the best use of your money, when you calculate the rate-of-return and opportunity costs.  Consider this example of a homeowner who has a 30-year mortgage loan with an interest rate of 4.500%, and they’re in the 32% tax bracket (both federal and state), that means the effective interest rate on their mortgage loan after their tax benefit is factored in, is approximately 3.000%.  So when considering this example, simply ask yourself if you would invest in an account that would give you a rate-of-return of 3.000%.  If so, then overpay your mortgage, if not, then think about putting your money to work in another way, vs. overpaying your mortgage, since overpaying your mortgage (in this example) provides you with a 3.000% rate-of-return.  However, you should never, ever overpay your mortgage if you’re carrying other debt at higher interest rates, since overpaying and accelerating other debt with higher interest rates provides you with a much higher rate-of-return.   For example, if you have a credit card with a balance of $3,000 and the interest rate is 9.99%, then accelerating that debt provides you with a 9.99% rate-of-return, which is much higher than the effective interest rate of 3.000% used in this example, and why you should always prioritize accelerating other debt first before accelerating a mortgage loan. 

Therefore, if your dead-set on accelerating your mortgage loan, then before refinancing out of your 30-year mortgage loan, and into a shorter-term mortgage loan, evaluate how much interest you could save and how many years you could shave off your current loan, by simply applying annual and/or monthly principal pre-payments to your current mortgage loan.  Then compare that option to refinancing into a new 20-year and/or 15-year mortgage loan, and only refinance if refinancing makes better financial sense than overpaying and accelerating your current mortgage on your own.

An Innovative Home Financing Solution to Pay Off Your Home Quickly

For those Colorado homeowners who are serious about accelerating their mortgage debt, there’s a much more efficient and effective option then refinancing into a shorter-term mortgage, or overpaying your current 30-year mortgage loan.  This option just became available again, after a two (2) year hiatus.  It’s called the All-In-One Loan, and as the popular economist Ben Stein puts it, the All-In-One Loan is the “greatest invention in personal finance in my lifetime”.

Basically, the All-In-One Mortgage Loan will enable you to pay off your home in a fraction of the time it takes with a traditional 30-year mortgage loan, all the while with far less interest costs.  Even when compared to 20-year and/or 15-year mortgage loan, the All-In-One Mortgage will allow you to pay-off sooner, and again, with far less in interest costs.

The All-In-One Loan

The All-In-One Loan is a unique home loan offered by only a handful of mortgage lenders in partnership with CMG Financial Services, Inc. The All-On-Loan replaces a traditional mortgage with a combination of a first-position home equity line of credit (HELOC) and a checking account. When used effectively, the All-In-One Loan can reduce interest costs and the time it takes you to fully pay off your mortgage by using your idle cash more efficiently, and all along gives you the flexibility to access the cash paid into your loan when needed, and all this with no change to your spending habits. 

As of 2005, the All-In-One Mortgage Loan was non-existent in the United States, but it’s very important to note that this type of loan is nothing new, as its predecessors are well established and even the most popular and typical type of mortgage loan in Canada, Australia, the United Kingdom, South Africa, and most of all the countries that make up Europe for more than 30 years.

The versions in these other countries, which are called an “Off-Set Mortgage” or “All-in-One Account/Loan”, are slightly more straightforward.  The mortgage is simply linked to a non-interest bearing checking and/or savings account. The entire balance in the account is then applied against the mortgage loan balance.

For example, if a borrower has a $100,000 mortgage loan, but has $100,000 in their checking and/or savings account, they are then charged 0% on their mortgage.  If the borrower’s savings and/or checking account balances fall below the principle balance on their mortgage, they are only charged interest on the difference and current balance, not the original loan balance.  This is made possible, by decoupling the principal and interest relationship, and removing the amortization schedule altogether.

The All-In-One Loan is specifically designed to help you pay off your mortgage balance faster — meaning you pay less interest — than with a traditional mortgage. The key to paying off your home loan balance faster and minimizing interest cost is to drive down your principal balance (even temporarily) by depositing any cash you aren’t using right now into your All-In-One account.  The longer your money stays in the account, keeping your balance lower, the more interest you save. Plus, the interest expense saved can be greater than interest earned from traditional checking and savings accounts, money markets and/or CDs.  Paying less interest means that more of your income can go toward paying your principal balance. This is what allows you to pay off your loan years earlier than you would using a traditional mortgage. 

How Does the All-In-One Loan Work?

Unfortunately, in the United States, the IRS taxes “interest paid” and “interest received” differently than in the aforementioned countries where the “Off-Set Mortgage” is most popular.  Therefore, the All-In-One Mortgage Loan here in the U.S. operates in a slightly different manner. The IRS will not allow taxable interest paid and received to cancel each other out as it’s allowed in these other countries, so each must be reported separately.

Therefore, in order for the U.S. version of the Offset Mortgage to meet IRS guidelines, it must combine a 1st position Home Equity Line of Credit (HELOC), and a checking account into one account, but this one account does not truly “offset” the other as it does with the “Offset Mortgage” in these other countries. However, deposits added to your All-In-One account lower your loan balance, while payments made from your account increase your balance. The interest you pay is based on the average daily balance of your loan, calculated each month, and debited from the account at the end of each month. By making deposits as soon as possible and delaying any payments until they are due, you can pay off your balance faster and lower your interest costs.

The All-In-One Loan comes with all of the amenities of a typical and normal U.S. checking account, such as ATM and debit cards, automatic bill payments, online banking functions, direct-deposit, and a checkbook, but most importantly, it allows every spare dollar the homeowner has, to be used to offset the mortgage principal balance, until it is ready to be spent, and any money that isn’t spent, carries over to the next month.

For many people, the largest regular deposit is a paycheck.  Directly depositing your paycheck into your All-In-One account is the best way to pay down your principal balance and reduce interest on your loan. At the end of each day, any additional deposits you make to your All-In-One Loan checking account are swept out as a payment against your line of credit, therefore reducing your loan balance, which in turn reduces the amount of interest you’ll pay at the end of the month.

Finally, the All-In-One Mortgage Loan is fully reversible and open-ended, and any extra cash being used to offset the principal balance, deposited, and/or any large pre-payments to the principal, can be retrieved anytime by using the ATM cash-withdrawal, transfers to other bank accounts, debit card, online bill pay, or by writing a check, which solves a major problem inherent in trying to accelerate a traditional fixed closed-ended mortgage loan, because again, any monies used to pre-pay principal, get “locked-up” into a liquidity trap, and is not accessible unless the homeowner refinances to borrow against their home-equity, or sell the home to turn the home-equity into cash.  With the All-In-One Loan, the borrower’s money and home-equity is always accessible, even the amounts that have been pre-paid, therefore it gives the homeowner much more choice and control over their mortgage debt, and therefore, over their home.

Is the All-In-One Loan Suitable for You?

The All-In-One Loan is not for everyone, but at the very least, everyone should know about it, and make the effort to educate themselves about this particular mortgage loan.  If you have interest in learning more about the All-In-One Loan or how to refinance into a shorter term mortgage and how it could be a good fit for you, please CLICK HERE to complete a quick online form, and I will contact you as soon as possible.

Christian Durland NMLS#249348 | Colorado Loan OfficerChristian Durland NMLS#269348 I've been in the Mortgage Industry since 2002. Since theres no one size fits all solution, my team and I focus on understanding each clients unique short and long-term financial goals, and then recommending the optimal financial instrument (mortgage), whether its for a new home purchase or refinance.
I've established a strong network of professionals within the Real Estate and Financial Services Communities to provide the valuable resources necessary for our clients to be financially successful.

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