Smart Ways to Build Equity in Your New Home

Now that you’ve invested in a home, how do you increase its value?

That’s called “building equity.” Equity is the market value of your home or property, minus your outstanding mortgage debt. So, for example, if you can sell your home for $450,000 and you still owe $100,000, you have $350,000 in equity. Building equity is one the biggest financial benefits of ownership.

If you live in a market where home values are rising, yours may float up with the rising tide and your equity will increase without doing a thing.

Or you can work on growing your home’s value by decreasing the amount you owe and/or increasing the value of your property. Here are some ways to do both.

Mortgage payments

Part of every mortgage payment goes towards paying off your loan’s principal and interest, with most of the payment going to interest in the loan’s early years. You can use Zillow’s amortization calculator to estimate how much money will be paid over the life of your loan for principal and interest. If you pay down the principal faster, your equity should increase faster. This can be done a few different ways.

Paying more: If you have a 30-year mortgage, adding more to your payment either monthly or when you have extra cash can help you gain equity. If you pay more, make sure your lender applies it to your principal. This is a great way to use your tax refund, a bonus from work or an inheritance.

Paying faster: You could divide your monthly mortgage payment into two bi-weekly payments, for a total of 26. So instead of 12 payments a year, you make the equivalent of 13, paying down your mortgage faster and gaining more equity. But make sure to check with your lender first to make sure they accept bi-weekly payments. And make sure all the extra money goes immediately to the principal instead of waiting for the second half-payment. Reputable lenders will not charge a fee for bi-weekly payments.

Refinancing: If you have a 30-year mortgage, you might want to consider refinancing to a 15-year loan, which has a lower rate. Most consider this worthwhile only if you can drop your interest rate by at least 1.5%. Factor in any closing costs before making this move. Also make sure your mortgage doesn’t have a penalty for pre-payment. It’s not common, but it’s better to check.

Before you decide on any of these options, consider if it’s really the best use of your money. If you’re not maxed out on employer-matched saving accounts, perhaps you should be putting extra money into your 401(k) rather than paying off a low-interest mortgage. It’s smart to talk with a financial advisor to determine the best investment strategy for you.

Also make sure you have an emergency fund, typically 6 months of savings in case you fall ill or lose a job.

Renovate wisely

Making smart improvements and adding the right amenities to your home can also increase its market value, which means more equity for you.

How do you know which projects will bring the best return on your investment? Even though you’ve just moved into your new place, there are home improvements buyers typically love: bathrooms, attics, entrances, kitchen updates, garage doors and siding. Popular features can vary by area and home type, so consider what’s in demand in your market.

Also, be mindful of your market as you’re thinking about how much to invest in improving your home. The realities of a buyers or sellers market will have an impact on how much return you’ll get when you sell.

You can find more inspiration, ideas and guidance in Zillow Porchlight home improvement articles.

For new homeowners, Zillow’s design and home improvement videos show you how to tackle your first project.


5/1 ARM vs. the 30-Year Fixed : Pros and Cons

Last updated on August 4th, 2020

Here we go again…it’s that special time where I compare two popular home loan programs to see how they stack up against each other. Today’s match-up: “5/1 ARM vs. 30-year fixed.”

Everyone has heard of the 30-year fixed-rate mortgage – it’s far and away the most popular type of mortgage loan out there. Why? Because it’s the easiest to understand and presents no risk of adjusting during the entire loan term.

It’s basically the default home loan option whenever mortgage lenders advertise interest rates, and the pre-selected option when using a mortgage calculator.

But what about the 5/1 ARM? Do you even know what a 5/1 ARM is? What the heck is that slash doing there!? This looks confusing…calm down, we’ll get through it.

5/1 ARM vs 30-Year Fixed

Jump to 5/1 ARM topics:

– What Is a 5/1 ARM?
– 5/1 ARM Mortgage Rates
– 5/1 ARM Example
– 5/1 ARMs Will Likely Adjust Higher
– Is a 5/1 ARM a Good Idea?
– Pros and Cons of 5/1 ARMs
– 5/1 ARM FAQ

What Is a 5/1 ARM?

5/1 ARM

  • It’s an adjustable-rate mortgage with a 30-year term
  • The interest rate is fixed (does not change) for the first five years
  • And adjustable (the rate can rise or fall) during the remaining 25 years
  • It adjusts once each year after the first five years

Simply put, a 5/1 ARM is an adjustable-rate mortgage with a 30-year loan term that has a fixed interest rate for the first five years and an adjustable interest rate for the remaining 25 years.

So during years one through five, the interest rate never changes. If it starts at 4%, it remains at 4% for 60 months. Nothing to worry about there.

But after the first five years are up, the interest rate can adjust once annually, either up or down. That’s where the “1” comes in, as in one adjustment per year.

This means it’s a hybrid ARM – partially fixed, and partially adjustable.

Whew! There you have it, the 5/1 ARM broken down into simple terms we can all understand. Oh, and don’t get hung up on that pesky slash.

While not as popular as the 30-year fixed, it’s a pretty popular adjustable-rate mortgage product, if not the most popular. And as such, just about all mortgage lenders offer it.

It’s an option for conventional loans, FHA loans, and VA loans (but not USDA loans). So you won’t have any trouble finding it. This should make comparison shopping quite easy too.

5/1 ARM Mortgage Rates Are Lower. That’s the Draw

30 vs 5/1 rates

  • 5/1 ARM mortgage rates are cheaper than comparable 30-year fixed rates
  • Because your rate is only fixed for a short period of time
  • And can increase significantly once it becomes adjustable
  • The discount might range from .25% to 1%+ over time

The biggest advantage to the 5/1 ARM is the fact that you get a lower mortgage rate than you would if you opted for a traditional 30-year fixed.

You get a discount because your interest rate isn’t fixed, and is at risk of rising once the initial five-year period comes to an end. Of course, if you refinance your mortgage at that time you can avoid the rate changing.

As you can see from the chart I created above, the 5/1 ARM is always cheaper than the 30-year fixed. That’s the trade-off for that lack of mortgage rate stability.

But how much lower are 5/1 ARM rates? Currently, the spread is 0.55%, with the 30-year averaging 4.45 percent and the 5/1 ARM coming in at 3.90 percent, per Freddie Mac data.

Since Freddie began tracking the five-year ARM back in 2005, the spread has been as small as 0.27% and as large as 1.30% in 2011.

If the spread were only 0.25%, it’d be hard to rationalize going with the uncertainty of the ARM. Conversely, if the spread were a full percentage point or higher, it’d be pretty tempting to choose the ARM and save money for at least 60 months.

The Freddie Mac survey only covers conforming loans. The spread might be different for jumbo loans, depending on market conditions. And it may also be significantly understated.

Either way, take the time to compare lenders since rates (and loan payments) can vary considerably, just like fixed interest rates.

Let’s look at an example of the potential savings of a 5/1 ARM:

$300,000 Loan Amount 5/1 ARM 30-Year Fixed
Mortgage Rate 3.5% 4.5%
Monthly P&I Payment $1,347.13 $1,520.06
Total Cost Over 60 Months $80,827.80 $91,203.60
Remaining Balance After 60 Months $269,091.53 $273,473.41
Total Savings $14,757.68

Assuming you can snag a 1% lower rate on the ARM vs. the fixed product, you could potentially save nearly $15,000 over the first five years, not taking into account tax deductions.

That’s a pretty big win, though you do have to consider what happens in month 61. Does the rate (and payment) on the ARM jump significantly at that time, and begin eating into those initial savings?

Or do you have a plan to avoid that, such as a home sale or refinance? As you can see, the savings can be tremendous, but there’s risk involved too as we won’t know where rates will be five years into the future.

This lower-payment mortgage may also free up cash to pay off credit card debt, student loans, an auto loan, or any other higher-APR debt you hold, or for home improvements.

You’d also pay down your mortgage faster because more of each payment would go toward principal as opposed to interest.

So you actually benefit twice. You pay less and your mortgage balance is smaller after five years (more home equity and a higher net worth).

After five years, the outstanding balance would be $273,473.41 versus $269,091.53 on the five-year ARM. That’s another $4,400 or so in savings for a total benefit of nearly $15,000.

Discussion over, the ARM wins! Right? Well, there’s just one little problem…

It might not always be this good. In fact, you might only save money for the first five years of your 30-year loan.

After those initial five years are up, you could face an interest rate hike, meaning your 5/1 ARM could go from 3.50% to 4.50% or higher, depending on the associated margin, the rate caps, and the mortgage index.

And most importantly, the adjusted rate may not be affordable, which can lead to a lot of trouble.

5/1 ARMs Are Cheap But Will Likely Adjust Higher

  • While the start rate on a 5/1 ARM can be enticing
  • Expect the rate to be higher in year six and beyond
  • Since ARMs typically adjust higher, not lower
  • But if you only keep it for a short time it can be a big money-saver

Currently, both ARMs and mortgage indexes are super low, but they’re expected to rise in coming years as the economy gets back on track, which it will eventually.

And you should always prepare for a higher interest rate adjustment if you’ve got an ARM.

In fact, during the loan application process mortgage lenders typically qualify you at a higher expected rate to ensure you can make more expensive mortgage payments in the future should your ARM adjust higher.

To that end, qualifying shouldn’t be any easier relative to fixed-rate mortgages.

So that’s the big risk with the 5/1 ARM. If you don’t plan to sell or refinance before those first five years are up, the 30-year fixed may be the better choice.

Although, if you sell or refinance your mortgage within say seven or eight years, the 5/1 ARM could still make sense given the savings realized during the first five years. And most people either sell or refinance within 10 years despite taking out fixed loans with 30-year terms.

The big question is where will refinance rates be when it comes time to make your move? And home prices.

If you came in with a low down payment and home values drop and it’s difficult or impossible to refinance, you could be trapped if you don’t sell your home. That’s the great unknown of going with an ARM – and trying to time the real estate market is nearly impossible.

Is a 5/1 ARM a Good Idea?

  • It really depends on what your plan is for the property
  • If you know you won’t keep it for five years it could be a no-brainer to save money
  • But if you plan on keeping your home for the long-haul and interest rates rise
  • There’s a chance it could cost you more money if your rate adjusts significantly higher

If you do decide to go with a 5/1 ARM, or any ARM for that matter, make sure you can actually handle a larger monthly mortgage payment should your rate adjust higher. Paying the mortgage with your credit card isn’t a good strategy.

Also realize that refinancing won’t always be an option; you may not qualify if your credit score goes down or your income takes a hit, or refinance rates may be too expensive to justify a refi. It’s never a guarantee.

If you actually plan to pay off your mortgage, an ARM loan could be a bad idea unless you seriously luck out with rate adjustments. Or you serially refinance before the ARM adjusts and pay extra each month to shorten the amortization period.

Otherwise, there’s a good chance you’ll pay a lot more than you would have had you gone with the 30-year fixed rate mortgage.

Why? Because each time you refinance to another ARM, you’re getting a brand new 30-year term. That means more interest is paid over a longer period of time, even if the rate is lower. If you don’t believe that, grab a mortgage calculator and do the math.

However, if you’re a savvy investor and have a healthy risk-appetite, the 5/1 ARM could mean some serious savings, despite the potential of the rate changing, especially if the extra money is invested somewhere else with a better return for your money.

Just know what you’re getting into first with this loan type and how high the rate can climb during the life of the loan.

Your financial advisor probably won’t recommend it, but that doesn’t mean it’s not a good deal. In reality, a ton of home buyers could probably benefit from an ARM because they don’t hold their mortgages for more than a few years anyway. So why pay more?

Five years not enough for you? Check out the 30-year fixed vs. the 7-year ARM, which provides another two years of interest rate stability compared to the 5/1 ARM. The rate may not be as low, but you’ll get a little more time before that first rate adjustment.

Or go the other way and check out the 3/1 ARM, which gives you two less years of fixed-rate goodness but might come with a slightly lower interest rate.

Pros and Cons of 5/1 ARMs

The Good:

  • Cheaper than 30-year fixed mortgages
  • Interest rate won’t change for a full 60 months
  • Rate can adjust lower or not at all
  • Might be able to refinance or sell before it adjusts higher
  • Could be a good choice if you have bad credit and want a lower rate
  • Can switch loan products once you’re more financially fit and have excellent credit

The Potential Bad:

  • The interest rate can adjust much higher
  • Five years can go by very quickly
  • Housing payments may become unaffordable
  • No guarantee you can sell your home or refinance before that time
  • Might cost you more money vs. taking a slightly higher fixed rate at the outset
  • Could actually be harder to qualify depending on what rate is used (fully indexed rate or the note rate)


How much cheaper is the 5/1 ARM vs. the 30-year fixed?

As noted above, it depends on the spread between the two loan programs at the time you apply for a mortgage.

It can be quite minimal, just 0.25%, or more than 1% lower, depending on the interest rate environment and the lender in question. It’s very important to know the spread to determine if it’s worth the risk.

Is the 5/1 ARM due in full in just five years?

No, the five-year part just refers to the amount of time the interest rate is fixed. It’s still a 30-year loan. The rate doesn’t change during the first five years, but is annually adjustable for the remaining 25 years.

Can I get a 5-year mortgage?

I haven’t heard of a home loan with a term as short as five years, but that’s not to say it doesn’t exist, somewhere…

However, you can get a 10-year fixed, or simply pay extra each month to effectively pay off your loan in five years or less, if you wish.

What happens when the first five years are up on my 5/1 ARM?

Your interest rate will become adjustable, based on the lender-assigned margin and the mortgage index it’s tied to.

At that time, you can do nothing and simply accept the new fully-indexed rate (and corresponding monthly payment), or refinance your loan into something new. Some homeowners may sell before the five years are up as well.

Can a 5/1 ARM be refinanced?

Yes, assuming you qualify for the refinance. You can start with an ARM and move into a fixed-rate mortgage later, or go from an ARM to another ARM if you wish.

Can I get another 5/1 ARM after the first five years are up?

You sure can, again, assuming you qualify. Of course, you have to consider if rates are favorable at that time to do so. Also note that you’ll restart the clock with a fresh 30-year term if you do.

Can you pay off a 5/1 ARM early?

Like any other mortgage, you can pay more than the amount due and whittle down your outstanding balance and loan term.

It could even be a good idea if you want a lower balance at the time your loan is first scheduled to adjust. For example, the smaller balance might make it easier/cheaper to refinance thanks to a lower LTV.

Is this a risky loan program? Should I just stick with a 30-year fixed?

This is an age-old question that can’t be answered universally. For someone who plans to pay off their mortgage in full, a fixed-rate loan might be a better call.

Conversely, if you plan to sell or refinance in a relatively short period of time, the 5/1 ARM can be a real money-saver. The key is having a plan and knowing the risks involved, namely that the rate can increase, sometimes significantly.


Amortization Calculator

Any time you take out a loan, you’ll have to pay it back with interest. When you borrow money, your lender will provide you with an amortization schedule. That may sound like a confusing term, but amortization is really just the process of spreading your loan amount out over a fixed period of time.

Your amortization schedule explains how many monthly payments you’ll make, how much you’ll pay each month, and what portion of your payment goes toward interest versus your principal balance. This schedule helps you better understand what you’re paying for at what point in your loan, and when you’ll finally start making a dent in your equity.

In this article

Wondering how to calculate your amortization? There’s a mathematical formula you can use to figure out your own payment schedule, but you can also use an online amortization calculator to do the work for you.

Amortization calculator

Amortization is the process of paying off debt on a set schedule, with payments spread out over a number of years. When you borrow money, the lender uses an amortization formula to figure out how much your monthly payments are each month so you can pay your loan off on time.

Each month, a portion of a borrower’s payment goes toward the principal balance, while the rest of it goes toward interest. With some types of loans, the payments will look different depending on where you are in the loan term.

For example, in the case of a mortgage’s amortization, payments made in the early years consist primarily of interest. The further into the mortgage you get, the more of your payments go toward the principal.

Amortization occurs over a different timeline for different types of loans. Mortgages are typically amortized over 30 years, meaning the borrower makes set monthly payments for 30 years until the loan is repaid. For a personal loan or car loan, amortization might occur over just a few years. When you borrow money for any reason, your lender will likely provide you with an amortization schedule. This schedule will tell you how many payments you’ll make and how much you’ll have to pay each month.

The amortization schedule you’ll receive assumes that you’re making the minimum required payment each month. You often can pay down your loan more quickly by making larger payments, and therefore save money on interest. Just be sure your loan doesn’t have an early payoff penalty.

Amortization applies to fixed loans like mortgages and auto loans, but it doesn’t apply to all debt. Credit card debt, for example, isn’t amortized. The interest is calculated separately each month, and how much you pay will depend on your current credit card balance.

As a borrower, understanding amortization is beneficial because it gives you a greater comprehension of how your loan works. It helps to explain how your lender decides how much your monthly payments will be.

[ Read: Compare Today’s Best Mortgage Rates for November 2020 ]

Definitions to know

Before you borrow money, it’s important that you understand the amortization process and the important words and phrases in your loan terms.

Some terminology you’re likely to come across includes:

  • Principal: The principal of a loan is the initial amount you borrow. Suppose you borrow $10,000 to buy a car. You ultimately end up paying quite a bit more with fees and interest, but the $10,000 is still your loan principal. The amount of interest you’re charged at any given time is based on the remaining principal balance.
  • Interest rates: Interest refers to the money that you pay in addition to your principal balance when you pay back a loan. Think of it as the cost of borrowing money. The interest rate on any given loan is the specific amount you’ll pay. Different factors can impact the interest rate, including the type of loan and your creditworthiness as a borrower.
  • Number of payments: When you take out a loan, the contract will contain loan terms, including a payment schedule. The payment schedule will include the number of payments you’ll make to pay back your loan and how much each payment will be.
  • Amortization: Amortization is the process of paying off debt on a set schedule, with payments spread out over several years.
  • Lender: The lender in a loan relationship is the party that lends money to the other with the expectation that they will be paid back on time with interest.
  • Borrower: The borrower in a loan relationship is the one who receives money from the other party. They’ll have to eventually pay back the agreed-upon amount based on the terms laid out in the contract.

[ Read: Best Mortgage Lenders for November 2020 ]

Amortization formula

Lenders use an amortization formula to determine the amortization schedule of your loan. The formula uses the principal loan amount, interest rate and total number of payments to determine how much each payment will be.

Here’s what goes into the formula:

  • M = monthly payment
  • P = principal loan amount
  • r = monthly interest rate (keep in mind that the rate your lender gives you is an annual rate, so you’ll have to divide that rate by 12 to find your monthly interest rate.
  • n = number of payments. The total number of payments is the number of years of the loan (which you should know upfront) multiplied by 12 months per year.

The amortization formula looks like this:

M = P [ r (1+r) ^ n / ((1+r) ^ n) -1) ]

Let’s use this formula with a real-world example to help give an understanding of how it really works. Suppose you’re borrowing $10,000 at a rate of 4% to buy a car. The loan term is three years. For the purposes of this example, these are the figures you need for the formula:

  • P = $10,000
  • r = .33% (the 4% annual rate divided by 12)
  • n = 36 (the three-year term multiplied by 12 months per year)

For the first month, the amortization formula would look like this:

M = 10,000 [ .33 (1+.33) ^ 36 / ((1+.33) ^ 36) -1) ]

Your monthly payments for this loan would be $295.24. In the first month, $261.91 of your payment goes toward principal, while the other $33.33 goes toward interest.

As you progress through the loan, you’ll pay less and less each month toward interest. And don’t worry — you don’t have to run the formula yourself! You can find an amortization calculator online that will do the math for you.


Paying More Today Won’t Lower Future Monthly Mortgage Payments

Posted on February 24th, 2021

Just about everyone with a home loan ponders the idea of paying a little extra, whether it’s via biweekly mortgage payments, or just once a year after receiving a sizable bonus or tax refund.

Whatever the method, you should first consider why you’re thinking about paying your mortgage off early as opposed to putting the money elsewhere.

This is a particularly important question to ask in the super-low mortgage rate environment we’ve been enjoying for some time.

Simply put, mortgage borrowing is really cheap, and probably the least expensive debt you’ve got, so prioritizing it over other debt may not make sense.

For example, if you have student loan or credit card debt, it might be more beneficial to pay that off first.

Anyway, assuming you do decide to make extra mortgage payments, whether significantly larger or just a little more than required, your next monthly payment won’t be affected by the previous payment.

You will still owe what you owed the month before, regardless of your principal balance being smaller.

While this might sound unfair, it all has to do with math and the fact that a mortgage is an amortizing loan.

A Mortgage Is an Amortizing Loan with Equal Monthly Payments

  • Most mortgages have a set loan term in which they are paid off in full
  • Fully-amortizing payments consist of a principal and interest portion
  • The monthly payment amount typically doesn’t change unless it’s an ARM
  • But the portion that goes to principal/interest will adjust over time as your loan is paid off

Traditional mortgages are paid off over a certain set time period with regular monthly payments that consist of a principal and interest portion.

This total payment amount does not change (barring an ARM adjustment or negative amortization) regardless of whether you pay more than is due each month.

The only thing that changes over time is the composition of your mortgage payment, with the portion going toward principal increasing over time as the loan balance falls.

As more goes toward principal, less go toward interest – picture an old-fashioned balance scale where one side drops while the other rises.

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

Mortgage amount: $100,000
Mortgage interest rate: 5%
Loan type: 30-year fixed
Monthly payment: $536.82

In this example, your monthly mortgage payment would be $536.82 per month for 360 months.

The very first payment would allocate $416.67 toward interest and the remaining $120.15 would go toward principal.

This right here illustrates how interest on mortgages is front-loaded, with about 78% of the payment going toward interest and doing nothing to pay down the loan balance.

To calculate the interest portion, simply multiply 5% by $100,000, and divide it by 12 (months). The principal portion is the remainder, as noted above.

For the second payment, you need to use an outstanding balance of $99,879.85 to account for the principal amount paid off via payment one.

So to calculate interest for the second payment, you multiply $99,879.85 by 5% and come up with $416.17. This is the interest due and the remainder of the $536.82 payment goes toward principal.

Over time, the interest portion decreases as the outstanding balance decreases, and the amount that goes toward principal increases.

Pay More Each Month and the Payment Composition Will Change

payment composition

  • While paying more than necessary won’t lower the minimum amount due on your next mortgage payment
  • It will change the composition of all future payments thanks to a lower outstanding balance
  • This means you’ll save on interest and reduce your loan term despite owing the same each month
  • In other words paying extra is well-suited for those looking to save money long-term, not to obtain payment relief

If you make some additional payments, the outstanding loan balance will drop prematurely based on the original amortization schedule.

But instead of your monthly mortgage payments decreasing, the composition of your next payment (and the payment after that) becomes more principal-heavy.

In other words, the payment due would still be $536.82 the next month, but more of it would go toward principal (paying down your balance).

And for that reason, less interest would be paid throughout the life of the loan, and the mortgage would be paid off ahead of schedule. These are the two benefits of making larger payments.

The obvious downside is you wouldn’t enjoy lower payments in the future, which could be an issue if money becomes unexpectedly tight, especially seeing that you used it to pay your mortgage down quicker.

Instead, more money is essentially locked up in your home until you either sell the property or refinance and pull equity (cash out refinance).

Recast or Refinance If You Want to Lower Future Payments

  • As noted extra payments alone won’t lower future ones
  • The only way future mortgage payments will drop is if you recast your loan or refinance it
  • Make sure you have money in the bank after making any extra payments
  • The money could be trapped in your home and unavailable for other more pressing needs

If you made additional payments and want subsequent monthly payments to be lower, you have two options to get payment relief.

You can refinance the loan, which would also re-amortize the loan based on a brand new loan term. Of course, if you’re well into a 30-year loan, you’ll reset the clock if you go with another 30-year term.

That’s why it’s recommended to go with a shorter term loan when refinancing such as a 15-year fixed mortgage, which kind of defeats the purpose of lowering monthly payments.

The other option you might have is to request a “loan recast,” where the lender re-amortizes the loan based on the reduced principal balance.

This generally only makes sense if you make a sizable extra payment, something that would really change the payment structure of the loan.

In fact, some banks may only offer a recast it if you make a certain lump sum payment that cuts a certain percentage off the loan. They’ll also charge you a fee to do it in most cases.

So while both a refinance and a recast can lower monthly payments, you have to be careful not to tack on more costs as you attempt to pay your mortgage down faster.

At the end of the day, it can be very worthwhile to make larger payments even if your subsequent payments don’t change, just make sure you have money set aside for a rainy day.


Zillow, Spoofed on ‘SNL,’ Posts Record Earnings

After being the subject of a Saturday Night Live sketch about lockdown-era millennials fawning over digital home listings, Zillow Group announced record profits for the fourth quarter. So reports Bloomberg.

The company said that surging use of its websites and apps led to adjusted earnings of $170 million during the period, before interest, taxes, depreciation and amortization.

Zillow CEO Rich Barton told Bloomberg in an interview that “the Zillow brand has broken through to a new level of awareness and cultural significance.”

Read the full article from Bloomberg.


Zillow follows Saturday Night Live spoof with record profit

Zillow Group Inc. has cemented its role in the pandemic-era zeitgeist, with “Saturday Night Live”poking fun at homebound millennials who lust after online home listings.

The growing popularity of the company’s websites and apps has also earned the company record profits during the fourth quarter, with adjusted earnings before interest, taxes, depreciation and amortization of $170 million, according to a statement on Wednesday.

That beat the average analyst estimate of $125 million and represented a wide swing from a $3.2 million loss a year earlier period. The results sent shares surging as much as 13% to $193.39. The company’s stock had already jumped more than 600% since bottoming out in March.

The rally comes amid a housing boom in the U.S. that has been fueled by low mortgage rates. With Americans confined to their homes, Zillow scrolling has become a national pastime.

“Because of all the people who are stuck at home, dreaming about a new home, and because of all the millennials having babies and shopping for homes, the Zillow brand has broken through to a new level of awareness and cultural significance,” Zillow Chief Executive Officer Rich Barton said in an interview. “There’s lots more shopping, lots more dreaming, and lots more fantasizing.”

Zillow’s websites and apps received 2.2 billion visits during the fourth quarter. That drove revenue growth in the company’s core marketing business, which brought in $314 million, up 35% from the prior year.

Zillow’s booming marketing operation has shifted the spotlight away from its nascent home-flipping initiative. The company acquired 1,789 homes in the quarter, compared to 1,787 a year earlier, as it returned to pre-Covid purchasing levels after slowing acquisitions earlier in the year.

Zillow also announced it has agreed to pay $500 million to acquire Inc., which makes tools for house-hunters to arrange home tours with agents. The purchase fits a key theme in the U.S. housing market in recent months, as socially-distancing efforts and the coming-of-age of millennial homebuyers drives more house-hunting functions online.

That theme has also been good for other companies at the intersection of technology and the U.S. housing market. Shares in brokerage Redfin Corp. have soared, and next-generation home-flipper Opendoor Technologies Inc. went public through a merger with a blank-check company.

Barton said that Zillow, along with consumers, will benefit from the increasing digitization of the homebuying process.

“The seller and the buyer are going to win from more innovation, happening faster,” he said. “It’s long overdue.”


Zillow revenue grows 22% in 2020

Zillow Group reported fourth quarter 2020 revenue of $789 million on Wednesday, easily beating Wall Street’s estimates.

Despite what Zillow officials referred to as a “rough” first half of the year due to COVID-19’s impact on the economy, the $789 million represents a consolidated revenue growth of 22% from 2019.

It also boasted $170 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in the fourth quarter, above Wall Street’s estimate of $125 million. For the year 2020, Zillow posted $343 million in EBIDTA.

All of that pushed Zillow into the black during the fourth quarter. The company’s net profits checked in at $46 million in Q4, far above the $101 million loss it suffered in the fourth quarter of 2019. It’s the second consecutive quarter Zillow has been profitable.

Online traffic reached record highs, with 201 million average monthly unique users reported in the fourth quarter of 2020 – the most unique users Zillow has ever had in the fourth quarter of a year, according to officials – and 2.2 billion visits.

For 2020, Zillow reported 9.6 billion visits, up 19% from the previous year.

Zillow also announced it has agreed to pay $500 million to acquire ShowingTime, which makes software for prospective buyers to arrange showings with agents.

The Seattle-based company, which has mostly pivoted from selling advertising to real estate agents into iBuying, acquired 1,789 homes in the fourth quarter. That was just two more homes than they had acquired a year prior, just before COVID-19-related shutdowns froze the business in place.

In a letter to shareholders, Zillow CEO and co-founder Rich Barton and CFO Allen Parker said the company also expects a strong first quarter of 2021.

“Looking ahead, our Zillow economists have made bold predictions for an even stronger housing market in 2021 than what we experienced in 2020,” the letter states. “They are projecting the number of home  sales to grow 21% for the year, as well as double-digit home price appreciation.”

Year over year, Zillow’s IMT segment revenue grew 33% to $424 million, home segment revenue reported $304 million (a fourth quarter 2019-pace), and mortgage segment revenue grew 190% to $61 million. Cash and investments grew to $3.9 billion at the end of the fourth quarter, up from $3.8 billion at the end of the third quarter.

According to Zillow’s own Home Value Index, the company expects seasonally adjusted home values to increase by 3.7% from the end of December 2020 to March 2021, and by 10.5% through December 2021. It also predicts home value appreciation to peak in June 2021 at 13.5%.

The seasonally adjusted annualized rate of existing home sales in November 2020 was 6.69 million – up 25.8% from November 2019, per Jeff Tucker, Zillow senior economist. Officials expect this rate to remain high – above 6.65 million – through 2021. 

“Our bullish outlook for sales and home values is driven by the current strength of the home-buying market and our expectation that low mortgage rates, demographic tailwinds and an improving economy will continue to prop up market competition,” Tucker said.

Expect more technological advances for the company in the new year, the letter to shareholders said.

“We are connecting services together for our customers and using our low cost of customer acquisition across multiple products to compete against an industry of largely single-point  solution providers with high customer-acquisition costs,” it read.


How to Lower Your Closing and Mortgage Costs

Finding the best mortgage to fit your specific needs is no simple task. You should certainly shop around for your mortgage but you need tools to make apple-to-apple comparisons. If you’re not a math junkie, you’ll probably have some frustration working through the details but it will make you financially wiser in the end.

Understand the APR (Annual Percentage Rate)

The APR and mortgage interest rate are not the same. The interest rate is the amount you’ll pay to borrow the money as a percentage of the total loan amount. The APR is the annualized cost to take out your loan that includes interest, fees, points, mortgage insurance, and more. You should always expect to pay a higher APR than the interest rate.

When you shop for a mortgage, different lenders will offer different interest rates, fees, points, and other costs. You’ll see that one lender’s offer has a lower interest rate but higher fees. Another lender will have a higher interest rate but lower fees. The intention of the APR is to take these differences into consideration when deciding which loan will cost you less over the long run. The APR is most useful if you plan to keep the loan more for more than six or seven years. That’s because the APR calculation assumes that you’ll keep the loan for its entire term – usually 15, 20, or 30 years. In general, the APR becomes more accurate the longer you pay on the mortgage. For loans less than six or seven years, the interest rate is usually the better way to go if it means lower monthly payments.

When you are close to applying for a mortgage, ask the lenders that you are considering for a “Loan Estimate” (previously known as a “Good Faith Estimate”). You’re not required to provide written documentation to get a Loan Estimate. The only fee that can be charged is a small upfront fee to pay for pulling your credit report, usually no more than $20. Read the loan estimate in detail but on page 3, you’ll find information about the APR and different information about the cost after paying the loan for 5 years. This is not the same as the amortization schedule that you find with most online mortgage calculators (these only include interest and principal). The biggest difference is that at the 5-year mark, it shows you how much will have been paid in interest, principal, mortgage insurance, and loan costs. It also shows the APR for the entire length of the loan. You can compare these for two or more loans to see which works better for you financially. For apples-to-apples, compare 5 years between loans and APR between loans.

Lenders have some variance when they calculate APR because some fees don’t legally have to be included. Ask for a list of all fees that are included and any that are not so that you can do an apples-to-apples comparison. More ethical lenders include more fees, but that makes their APR appear higher.

If you’re looking to compare adjustable rate mortgages (ARMs) the APR can be useful but it has different calculations based on when the loan interest rate will adjust and how much the rate can adjust.

Some Closing Costs You Can Control

On page 2, section A of the Loan Estimate, you’ll find a breakdown of the costs shown on page 1 of the estimate. The lender won’t want to negotiate these but in the industry, some of these are known as “junk fees” (primarily the application and underwriting fees). At the very least, compare these between lenders. But don’t hesitate to ask to have these fees reduced. The industry is so automated today that it doesn’t justify charging $400 to press a computer button to process your application.

On page 2, section C of the Loan Estimate you’ll find a list of services that the lender allows you to shop for. These will probably be different depending on what part of the country you live in. Good ways to shop for these are through your real estate agent, friends, or a local website that rates professionals. Some of the services that you might be able to get a better price for include buyer’s attorney, pest inspector, homeowner’s insurance, title insurance and related services, survey, and notary. There may be others at your location.

Time of Year Can Affect Your Costs

This might surprise both you and your real estate agent but studies are showing the time of year can affect the cost of your mortgage. Studies suggest that during the slow season, some lenders reduce their costs to be more competitive. These savings aren’t likely to be major but it could mean a couple of tenths of a percentage point less on the interest rate. It could also be the time of the year when lenders are most likely to lower their costs for things like underwriting and application fees. January tends to be the lowest cost month, followed by December and February. The time between June and October are the most expensive. In a nutshell, the trend is towards higher costs based on the number of applications being submitted.

Please comment with your ideas to lower closing and mortgage costs.

Photo by J. Kelly Brito on Unsplash

Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.


What is amortization? How a mortgage amortization schedule works

What is mortgage loan amortization?

“Mortgage loan amortization” is the process of paying a home loan down to $0. 

A mortgage — or any other type of loan — is “amortized” if it’s paid in regular installments and will be fully paid off after a set period of time. 

Your mortgage amortization schedule determines when your home will be paid off and how quickly you build home equity. It also comes into play if you want to pay off the loan early. So it’s important to understand how your amortization schedule works. 

Check your mortgage loan options (Feb 3rd, 2021)

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How mortgage amortization works

If the amount you borrow for a mortgage loan is scheduled to be repaid in installments, your loan is amortized.

“Loan amortization is the process of calculating the loan payments that amortize — meaning pay off — the loan amount,” explains Robert Johnson, professor of finance at Heider College of Business, Creighton University.

“On a fully amortizing loan, the loan payments are determined such that, after the last payment is made, there is no loan balance outstanding.”

Amortization also determines what portion of your monthly loan payment goes toward principal or interest.

At the beginning of your amortization schedule, a larger percentage of each monthly payment goes toward loan interest; at the end, you’re paying more toward principal. 

Note: this affects only the breakdown of your payments. If you have a fixed-rate mortgage, the total payment amount will always stay the same.

This background math might not seem like it matters, especially since most mortgages have fixed payments.

But actually, the payment breakdown is very important because it determines how quickly you build home equity — which in turn affects your ability to withdraw equity, refinance, or pay off your home early.

Are all mortgage loans amortized? 

Almost all mortgages are fully amortized — meaning the loan balance reaches $0 at the end of the loan term. 

The exceptions are uncommon loan types, like balloon mortgages (which require a large payment at the end) or interest-only mortgages.

Most lenders don’t offer these — and most home buyers don’t want them — because these loans are riskier and don’t help the borrower build equity as quickly. 

With an amortized loan, your mortgage is guaranteed to be paid off by the end of the term as long as you make all your payments over the full life of the loan. 

How amortization affects your loan payments

Your amortization schedule doesn’t just determine when your mortgage will be paid off. It also determines how each monthly mortgage payment is divided between interest and loan principal. 

“Even though the loan payment every month will likely remain the same total amount, the proportion of interest and principal will differ with each subsequent payment,” explains Johnson.

“In the first payment you make on an amortizing loan — month one — you’ll pay the largest percentage devoted to interest and the smallest percentage devoted to principal.

“Conversely, in the last payment you make — month 360 on a 30-year mortgage loan — the largest percentage of your payment will go toward principal, and the smallest percentage will be devoted to interest,” Johnson notes.

The longer the term of your loan, the longer it takes to pay down your principal amount borrowed, and the more you will pay in total toward interest.

That’s why a shorter-term loan, like a 15-year fixed-rate mortgage, has a lower total interest cost than a 30-year mortgage.

Check your mortgage loan options (Feb 3rd, 2021)

Amortization schedule example

Here’s an example of how an amortization schedule would look for the following loan:

  • Loan amount: $250,000
  • Loan term: 30 years
  • Fixed interest rate: 3.5%
  • Fixed monthly P&I payment: $1,123

Mortgage amortization table

Each payment is the same total amount ($1,123). But note how more than half the payment goes toward interest in the first year, while only $3 goes to interest at the end of year 30.

Year  Principal Payment Interest Payment Principal Remaining Interest Paid
1 (Payment 1) $393 $729 $249,607 $729
5 (Payment 60) $467 $655 $224,243 $41,599
10 (Payment 120) $556 $566 $193,567 $78,281
15 (Payment 180) $663 $460 $157,035 $109,105
20 (Payment 240) $789 $333 $113,527 $132,953
25 (Payment 300) $940 $183 $61,711 $148,494
30 (Payment 360) $1,121 $3 $0 $154,144

Mortgage amortization chart

As you can see on the chart below, it’s not until year 19 that the amount of principal the homeowner has paid surpasses the amount of interest.

Examples generated using The Mortgage Reports mortgage calculator

Amortization affects only principal and interest

Note that your amortization schedule affects only the principal and interest (P&I) portion of your mortgage payment.

Regular payments include other homeownership costs, too; like homeowners insurance, property taxes, and if necessary, private mortgage insurance and/or homeowners association (HOA) dues.

Payments for these other expenses will not be affected by your amortization schedule. Although, they may be subject to change throughout the loan term — for instance, if your property tax rates or homeowners insurance premiums change.

Why your amortization schedule matters

“Amortization matters because the quicker you can amortize your loan, the faster you will build equity and the more money you can save over the life of your loan,” says real estate investor and flipper Luke Smith.

Look closely at your amortization schedule, and you’ll likely find that your loan will amortize a lot more slowly than you think.

“Many borrowers have a hard time grasping just how little of their monthly payment early on in the life of their loan goes toward repaying principal, and how much of the monthly payment late in the life of their loan is devoted toward repaying principal,” says Johnson.

Homeowners might not pay attention to their amortization schedule, because their total payment does not change.

But if you want to tap home equity or pay off your loan sooner, those principal-versus-interest numbers start to matter.

Building home equity

At the end of a fully-amortizing mortgage loan, you’ll own your home outright. Its value will be 100% equity.

But because of the way mortgage loans amortize, that equity is built up slowly.

For example, you can’t assume that completing half the loan term means you’ll own half the home.

Consider the example above. Although the full loan term is 30 years, it will take the homeowner 19 years — nearly two thirds of the term — to pay off half their loan principal.

If you took out the same loan amount ($250,000) with a 15-year term instead of a 30-year term, you will have paid off half the loan’s principal in year 9.

So a shorter repayment schedule doesn’t just help you save money on interest — it also helps you build tappable home equity more quickly.

Remember, you need more than 20% equity to draw on your home’s value via a cash-out refinance or home equity loan. Your amortization schedule will help you understand when you can reach the magic number to become eligible for home equity financing.

Paying off your mortgage

Some homeowners decide to pay off their mortgage early as a way to save on interest payments.

One way to do this is by refinancing into a shorter loan term, like a 10-, 15-, or 20-year mortgage.

But for homeowners who don’t want the hassle and cost of refinancing, an alternative is to make extra or “accelerated” payments toward the loan principal. Early payments can be in the form of:

  • One extra payment each year
  • Extra money added to each monthly payment
  • A one-time, lump sum payment

Early payments toward your loan’s principal balance can help shorten your amortization schedule. You’ll save money because you won’t have to pay interest on the months or years eliminated from your loan term.

You can use an amortization calculator with extra payments to determine how quickly you might be able to pay off your remaining balance, and how much interest you’d save.

Should you pick a long or short amortization schedule?

Before deciding on a mortgage loan, it’s smart to crunch the numbers and determine if you’re better off with a long or short amortization schedule.

The most common mortgage term is 30 years. But most lenders also offer 15-year home loans, and some even offer 10 or 20 years.

So how do you know if a 10-, 15-, or 20-year amortization schedule is right for you?

Benefits of a short-term loan

The obvious benefit of a shorter amortization schedule is that you’ll save a lot of money on interest.

For example, consider a $250,000 mortgage at a 3.5% interest rate:

  • A 30-year fixed loan would cost you $154,000 in total interest
  • A 15-year loan would cost you only $46,000 in total interest

“Short amortization schedules tend to be a sound financial decision if you are buying a starter home and want to build equity more quickly,” says Nishank Khanna, chief financial officer for Clarify Capital. “It means you’ll be paying more toward the principal upfront.”

Khanna continues, “Borrowers who make a large down payment or plan to make accelerated payments, or those who secure loans with low annual percentage rates can shorten their amortization schedule — thereby paying less money over the life of their loan and accruing home equity much faster.”

However, a shorter amortization schedule isn’t for everyone.

Drawbacks of a short-term loan

The biggest drawback to shortening your loan term is that monthly payments will be much higher.

Using the same example of a $250,000 loan at 3.5% interest:

  • Monthly P&I payments on a 30-year loan are $1,200
  • Monthly P&I payments on a 15-year loan are $1,600

The steep increase means many homeowners simply can’t afford a short-term mortgage.

In addition, choosing a shorter-term loan locks in your higher monthly payments — you’re obligated to pay the full amount each month.

With a longer-term loan, on the other hand, you can pay more to accelerate your amortization schedule if you wish. But you’re not committed to a higher monthly payment.

Check your mortgage options (Feb 3rd, 2021)

Can you change your amortization schedule? 

The good news is that even if you opt for a longer repayment schedule — such as a 30-year fixed-rate mortgage — you can shorten your amortization and pay off your debt more quickly by either:

  1. Refinancing to a shorter-term loan; or
  2. Making accelerated mortgage payments

Smith recommends making extra principal payments over choosing a 15-year loan.

“Get the most favorable rate and terms for yourself. Then, if more funds are available in your budget, pay your loan down more quickly than scheduled,” he says.

Smith explains you can “treat your mortgage like a 15-year mortgage rather than a 30-year loan by making accelerated payments, which most mortgage loans and lenders allow you to do without fees or penalties.

“This way, if a financial challenge occurs and you need the funds, you can temporarily or permanently stop making accelerated payments without any problems or repercussions.”

Should you shorten your amortization schedule?

“When interest rates are low and the majority of your payments are going toward principal, there may not be a strong case for paying off a mortgage more quickly,” Khanna suggests.

“If you think you can earn a higher return on your money through other investments like the stock market, avoid a shorter-term amortization schedule.

“Also consider that, when you pay off your mortgage earlier, you will lose out on tax breaks you may qualify for, such as the mortgage interest tax deduction, which can negate savings.”

Mortgage amortization: A personal decision

The decision between a short- or long-term loan should depend on your personal finances.

If you have a lot of monthly cash flow, and you want to save on interest, choosing a 15-year loan or shortening your amortization schedule with extra payments could be a smart strategy.

If you have a tighter budget — or you want to invest your money elsewhere — the traditional 30-year amortizing mortgage makes a lot of sense.

Compare all your loan options before buying a home or refinancing. And make sure you understand how amortization will affect your monthly payments, as well as your home equity options further down the line.

Verify your new rate (Feb 3rd, 2021)

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