15-Year Mortgages Gain Popularity

QUESTION: I am thinking about buying a house. I have saved about $30,000, but I know that is not enough to buy a place outright. And I don't feel comfortable with the idea of a 30-year loan. Is there any way I can compromise?--H. G.

ANSWER: Actually, your request isn't all that unusual. Lenders started seeing renewed interest in short-term mortgages--sometimes called quick-pay home loans--with the latest downturn in interest rates.

If the prospect of a 15-year loan doesn't scare you, a 15-year, fixed-rate mortgage is something that you will want to check into. Most lenders offer them now, so you shouldn't have any trouble finding one. And with your large cash savings, you shouldn't have any trouble coming up with required down payment, which is likely to be a few percentage points higher than the typical 20% down payment required on traditional 30-year mortgages.

Keep in mind that you will have to pay a little more each month than you would with a 30-year mortgage. The monthly payments on a $100,000 loan at 12.5% interest, for example, would be $1,067.26 over 30 years or $1,232.52 on a 15-year repayment schedule.

And because the monthly payments are higher, it is harder to qualify for a 15-year mortgage.

If you qualify, the advantages are that you pay less interest over the life of the loan--you would save $162,360 in all under our hypothetical $100,000 loan at 12.5%. You also build up your equity faster, and you can count on having cash for other purposes after 15 years instead of 30.

On the other hand, homeowners who desperately need tax breaks won't find these terms very attractive since they would lose thousands of dollars in interest write-offs.

Not as popular, but worth checking out, are 30-year mortgages with biweekly payments or increasing payment features. Although they start out as 30-year mortgages, you actually pay them off in 15 to 20 years.

By making half the usual monthly payment every other week, you pack in the equivalent of 13 months worth of principal and interest payments every year. Thus, the faster pay-back.

The increasing payment variety is sometimes called a growing-equity mortgage because your monthly payment--and therefore your equity--regularly grows by a predetermined amount. For example, you could expect your payments to increase 5% a year for the first 10 years of the loan and then to level off until you pay off the mortgage. This type of loan is particularly popular among young couples who expect their income to keep growing but who can't qualify outright for a 15-year loan.

Q: From time to time I see references to somebody's effective overall marginal tax rate. I have never been able to figure out how one arrives at it. Can you explain?--O. F.

A: A taxpayers' overall marginal tax rate is the sum of his state and federal marginal tax rates adjusted for the break he gets by deducting his state and local taxes on his federal tax return.

Say you are in a 38% federal tax bracket and a 15% state bracket. Your overall marginal tax rate would be 53%. But if you itemize your tax deductions, your effective combined tax rate is actually less because your federal tax would be reduced by 38% of your state tax. In other words, your effective marginal state tax rate is actually 9.3%. Thus, your effective overall marginal tax rate would be 47.3% (38% plus 9.3%).

This break allowed state and local taxpayers by the federal government would be repealed under the President's tax reform proposal. For that reason, some taxpayers in states with high state and local tax rates could actually wind up with a higher overall marginal tax rate despite the fact that the three-bracket arrangement proposed by the President is designed to lower most taxpayers' federal tax rate. Under the President's plan, Americans would be taxed at 15%, 25% or 35%.

Using our earlier example, you likely would be taxed at the top 35% rate under the President's plan. And we'll assume that your state doesn't alter its rates to adjust for changes in the federal tax structure. Thus, your overall marginal tax rate would be 50% (35% plus 15%) rather than the current 47.3% because of the lost state tax deduction.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business section, The Times, Times Mirror Square, Los Angeles 90053.

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