Another reason to pay down your mortgage

Posted: Jul 20, 2006 12:00 AM

Looking back to 1992-1993, I smile at the strange things that happened in the mortgage industry at that time. It was the time we hit 30 year lows and people were excited and frustrated at the same time. The bad part of the good time scenario was the housing recession in California; which was caused by the shutting down of the aero space plants and the laying off of thousands of workers. Real Estate had declined somewhat significantly then. It was a “kid in the candy store environment”. I only imagine that most of the teenage kids had acne and wasn’t allowed to have chocolate, so all they could do is look and drool.

What was the problem? Most people wanted to take advantage of the situation but couldn't get their house to appraise so they could refinance. I recall turning down two out of every three people who applied for a loan. The ones who made it through the appraisal process generally had 15 year loans. Those who didn’t generally had 30 year loans. The difference is simple: the first five years of a 30 year loan you payoff about 6% of the loan; a 15 year loan pays off about 20% of the loan. That was the major difference in being able to refinance to the exceptionally low rates.

Do not think that everyone just gave up. There were incredible schemes being hatched. I had a group of doctors who wanted to sell each other their homes so they could get better loans. Unfortunately you need an appraisal when purchasing a house and the lender takes the lower of either the purchase price or appraised value. The appraised value was always lower.

The need to pay down your mortgage is even more important today than in the early 90's. In those days more people had larger down payments (20%) when purchasing their homes. Today’s down payment is much less. The result is greater risk of getting the needed appraisal if housing pricing should reverse, even for a short period.

At Manhattan West we recognize all the factors which may work for or against you in the mortgage and real estate markets. We also try to prepare you for both the best and worse occurrences. Write to me at with your particulars and I will send you some thoughts on your situation.

Remember: Taking a 15 year loan is not a punishment but a large reward for you, the beneficiary!