Understanding the power of compounding interest can truly change your life. You’ve probably heard people describe money as a snowball – meaning it’s either shrinking or growing at an exponential rate. Well that simple concept should give motivation for people to aim to pay off their mortgages early if they can. If you’d like to see what I’m talking about Click Here to play with a mortgage calculator and study how much money you might save in interest if you pay a little extra each month. Or study below one of the other 3 paths. There’s never a better time than now to make a positive change in your life.
4 ways to pay off your mortgage early
by: Dana Dratch
If you can afford it, it might be simple to pay off your mortgage early. But should you? That’s a complicated question.
Homeowners with low mortgage rates may be better off putting extra money in a Roth IRA or 401(k), both of which might offer a higher return than paying off the mortgage.
Then there’s the college aid factor. If you’re applying for need-based aid for your kids, that home equity could count against you with some colleges because some institutions view equity as money in the bank.
If, after those caveats, you want to pay off your mortgage early, here are four ways to make it happen.
Should You Pay Off Your Mortgage Before You Retire?
There are many misconceptions about mortgages and retirement. Greg McBride breaks down the facts.
1. Refinance with a shorter-term mortgage
You can pay off the mortgage in another 15 years by refinancing into a 15-year mortgage.
Let’s say you got a 30-year fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can refinance into a 15-year loan at 4 percent. Doing so pays off the mortgage 10 years earlier and saves more than $60,000 (if you exclude closing costs on the refi).
Those shorter-term mortgages often carry interest rates a quarter of a percentage point to three-quarters of a percentage point lower than their 30-year counterparts.
Refinancing isn’t quick or free. It requires filling out the application, providing documentation and having an appraiser visit. There are closing costs.
And even with a lower interest rate, that quicker payoff means higher monthly payments. And this method is a lot less flexible. If you decide that you don’t have the extra money one month to put toward the mortgage, you’re locked in anyway.
Unless the new interest rate is lower than the old rate, there’s no point in refinancing. Without a lower rate, you’ll get all the same benefits (and none of the extra costs) by just increasing your payment a sufficient amount.
Divide your monthly principal and interest by 12 and add that amount to your monthly payment for a year. Result: You make the equivalent of 13 payments in 12 months.
Let’s say you got a $200,000 mortgage at 4.5 percent. After five years of making the minimum payments, you add an extra 1/12 of a month’s principal and interest to each monthly payment. Doing so pays off the mortgage three years and three months earlier and saves more than $18,000 interest.
Before you make anything beyond the regular payment, call your mortgage servicer and find out exactly what you need to do so that your extra payments will be correctly applied to your loan.
Let them know you want to pay “more aggressively” and ask the best ways to do that.
Some servicers may require a note with the extra money or directions on the notation line of the check.
In any event, if you’re putting extra money toward your loan, always check the next statement to make sure it’s been properly applied.
3. Make an extra mortgage payment every year
Instead of paying a little more each month, make one extra monthly payment each year. One way to do this is to save 1/12 of a payment every month, and then make an extra payment after every 12 months. This gives you the flexibility to use the extra savings for something else if a more pressing expense arises.
Let’s say you do this starting the first month after getting a 30-year mortgage for $200,000 at 4.5 percent. That would save more than $27,000 interest, and you would pay off the mortgage four years and three months earlier.
4. Throw ‘found’ money at the mortgage
Get a bonus? A tax refund? An unexpected windfall? However it ends up in your hands, you can funnel some or all of your newfound money toward your mortgage.
Let’s say you got a 30-year, fixed-rate mortgage for $200,000 at 4.5 percent. Then, five years later, you can make an extra $10,000 lump-sum payment. Doing so pays off the mortgage two years and four months earlier, and saves more than $19,000 in interest.
The upside: You’re paying extra only when you’re flush. And those additional payments toward the principal will cut the total interest on your loan.
The downside: It’s irregular, so it’s hard to predict the mortgage payoff date. If you throw too much at the mortgage, you won’t have money for other needs.
Being a real estate agent is often a lot like being a party planner. There are several people and issues that need to be kept up with, and consistently held to account. Part of making sure that the party goes off without a hitch when working with a homebuyer is making sure that they have a financial plan to execute the purchase. Most people like to keep their finances rather private, so it’s important that people know that making that plan can be done in private. I often recommend that people use a few different free services to monitor their finances and credit: Mint.com, and Credit Karma. They both run ads, but if you can just ignore those you can be a step ahead. Feel free to send me a message if you have any questions about either one of those services. Now, read this article and if you don’t have these basic financial tools in place start setting them up. You can do it – now let’s make a plan and throw that party!
If you are seriously wanting to get your financial house in order you might reach out to an accountant/cpa and maybe even a financial planner to look at how you can use your money to best fit you life and goals. And you might also talk to an estate planner in case you are worried about what will happen to your assets in the case of you passing away. My sister Claire is actually an estate planner and you are more than welcome to call her to ask about what that looks like, just tell her that I sent you. 🙂
We call this our “curveball” account. It’s an emergency fund for use when life throws us curveballs – large medical bills, a job loss or reduction in income, major home repairs, that kind of thing.
3. Make a plan for big-ticket items.
My husband and I agreed that we would use one family credit card for large purchases, such as airline tickets and hotel stays. We still have our separate credit cards – it’s wise to keep your own credit cards to maintain your credit score and credit history. Using them once or twice a year should be sufficient. And don’t close those cards because it will affect your overall credit score.
Implementing the system
1. Draw up a budget for fixed and variable expenses.
Add up how much you need in each category. This will be your guideline for how much should be in each of your checking accounts.
Fixed expenses might include:
Rent or mortgage payment
Utilities (gas, electric, water, etc.)
Home, auto and umbrella insurance
Life, disability and long-term-care insurance premiums
Health insurance premiums (if not taken out of your paycheck)
Cable TV, Internet, phone and cellphone
Gym or yoga memberships
Debt payments (credit cards, student loans, car loans, personal loans, etc.)
Savings (yes, this is an expense – pay yourself first!)
Variable expenses might include:
Personal services (haircuts, doctor visit copays, etc.)
2. Distribute money to the accounts.
When your paycheck comes in, allocate the designated amounts into each checking account based on the budget you created. The sum earmarked for the curveball account can go there directly.
3. Pay fixed costs directly.
All bills are paid automatically from our fixed-expenses account. We do not have to write any checks, and no debit card is necessary. This account has a cushion of a few hundred extra dollars in case a bill shows up unexpectedly or before we have a chance to replenish the account.
4. Pay variable expenses from the second account.
This account should have a debit card, which you can use for purchases.
If an emergency arises, you can transfer funds within 24 to 48 hours. You can then access the money with a check or debit card.
Realizing the benefits
Once I implemented this system, the process of tracking expenses wasn’t so cumbersome anymore. Separating expenses into fixed and variable categories meant I didn’t have to worry constantly about checking account balances. Having fewer transactions in each account also made it easier to see the bigger picture of our spending.
Every family’s finances are different, of course. Feel free to customize my system as necessary. The point is to get – and keep – a grasp on the flow of your money. If you know exactly what’s coming in and going out, you can’t be surprised by debt.
One thing that seems more and more clear to me is that so goes millennials so goes the nation in next decade. If millennials decide not to buy houses there is going to be a large wealth shift – we will become even more of a renter society. So, a stable housing market that young people want to participate in matters. A lot of people are outraged by our nation, and world’s growing wealth gap (and in many ways rightfully so), but not participating in ownership of housing could be one of the greatest factors in the next great wealth shift. A lot of numbers show that young people do want to own their own stuff, and have a more self-sustaining lifestyle in a lot of ways. I’m just very curious which direction my peers and I are going to trend towards in regards to housing.
You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved. Here’s how we make money.
A New Year brings new opportunities, and that’s certainly true if you’re looking to sell or buy a home in 2016. What exactly does the year ahead have in store for housing?
Industry experts point to a lot of promising signs — moderate increases in prices and sales, the creation of more households, and an improving job market — for the national housing picture in 2016. But the gains won’t look like they have over the past two years, and we’ll see more local housing markets stabilizing in the near future. And that’s a good thing.
After the deluge of damaging foreclosures and short sales that flooded U.S. cities during the downturn, a number of housing markets have recovered in a big way in recent years, to the relief of homeowners and economic analysts alike. In 2013, there were 5.09 million existing-home sales nationally, according to the National Association of Realtors. In 2014, sales dropped by 3.1% to 4.93 million. Although final figures for 2015 are not yet available, NAR predicted existing-home sales would close out the year at 5.3 million — nearly 7% higher than the previous year.
With NAR forecasting existing-home sales to rise by 3% to 5.45 million in 2016, experts say we’ll start seeing more balance return to the housing market in the near future.
Here’s a closer look at five key housing predictions for 2016:
1. Rising rates will squeeze first-time homebuyers most
The Fed’s move to increase interest rates in December reflects the major strides the U.S. economy has made as it emerges from the Great Recession. Higher rates (though they haven’t happened yet), along with rising prices and limited supply, will make it harder for some to afford a new home. The good news: Long-term mortgage rates will see only a gradual increase this year and will remain relatively low compared with what they were before the downturn.
Thirty-year fixed-rate mortgages, which averaged under 4% for most of 2015, will average 4.4% this year, according to Freddie Mac. Meanwhile, housing data firm CoreLogic, in its latest U.S. Economic Outlook report, predicts mortgage rates will increase roughly half a percentage point in 2016 over 2015.
If you’re a first-time homebuyer or you earn a lower income and haven’t had a raise lately, the rate increase might make it harder for you to afford a home. For the most part, though, a slight rate bump isn’t cause for panic and is unlikely to sideline most potential homebuyers, says Christian Redfearn, an associate professor of real estate at the University of Southern California.
Increasing mortgage rates will clamp down on refinancing activity as fewer homeowners will have enough incentives to refinance their current mortgages, according to CoreLogic. As a result, the firm is forecasting refinance originations to decrease by one-third this year.
After years of depressed prices, many homeowners have regained much of the equity they lost in the downturn, so they may seek to cash in on that value and sell in 2016 to move up to their next home, NAR President Tom Salomone says. In some markets, though, prices have increased too quickly, causing a bumpy recovery that’s priced out some potential homebuyers, he says.
“We don’t want these big peaks and valleys we’ve seen since the downturn,” Salomone says. “Steady, sustainable growth is what we’re after.”
As the economy continues to grow and more jobs are added, potential homebuyers with strong credit will be more willing to jump into the market too, Salomone says.
3. House prices will increase, too, but not at 2015 levels
Another trend that sellers in particular will appreciate: Home prices will rise again this year by 4% to 5% as demand increases faster than supply, according to CoreLogic. Although the increase in home prices will outpace inflation, it’s less than the 6% increase seen in 2015.
The more measured growth of home sales and prices is good news for the millions of younger Americans who are on the cusp of homeownership. However, experts agree that a shortage of housing inventory and new construction, which leads to bidding wars and competitive market conditions, will fuel higher home prices until more sellers enter the market or more homes are built.
“We haven’t built enough housing for a long time,” Redfearn says.
4. Housing demand will be up
The improving job market has been a boon for new household formations, a term that refers to configurations of people who live together under one roof, be it you and a few roommates, a married couple, a nuclear family of four, or just you. This increase will continue in 2016, with more than 1.25 million new households expected to be formed.
Millennials — all 83.1 million of them — now outnumber baby boomers and comprise more than a quarter of the U.S. population, according to the Census Bureau. Many of them are moving out of their parents’ homes, getting married or having children. As they do, these young Americans will create higher housing demand, particularly for rental homes.
This new surge in demand is expected to spur more construction of single-family homes and multifamily apartment buildings, but not at the pace needed to keep up with new households. NAR forecasts 1.3 million single-family housing starts this year, but the country needs 1.5 million to keep pace with demand.
Freddie Mac predicts total housing starts will increase 16% from 2015 to 2016, but it’s still not enough. That’s why more people are turning to the rental market, which is faced with a similar crunch.
5. Rents will also rise
Construction of multifamily homes will increase this year, but there’s still a shortage of rental homes for the millions who need them. Rental vacancy rates are at or near their lowest level in 30 years, according to the CoreLogic report. Accordingly, rents in 2016 will continue to rise faster than inflation, CoreLogic predicts.
With rents climbing, it’s no wonder so many millennials struggle to afford a down payment. For starters, 41% of them are saddled with student loans that frequently run into the tens of thousands, according to NAR. Plus, wages are growing slowly or not at all as rents and other living costs get steeper. It’s a combination of challenges that makes it hard to save for a down payment on a home, experts say.
Homeownership rates will dip slightly again this year as the number of new households that rent exceeds the number of new homebuyers. However, 94% of renters under 34 surveyed by NAR say they still want to buy a home in the future, and that bodes well for a more balanced market in the years to come, Salomone says.
The bottom line
The housing market has come a long way since the Great Recession, but the recovery has been uneven, and some areas still have a long way to go.
A sustainable housing market, Salomone says, is one that’s fair for both buyers and sellers. All the signs we’ve mentioned point to a more balanced road ahead for housing, but it’ll take a little more time to get there.
With rates changing (if you don’t know about this it’s ok, but they are…) have you wondered how that might affect the loan that you should consider taking out for your home? Well, here is a very wonky article that can help you dive into this under discussed, and very important topic. It might be a good idea to play around with a mortgage calculator to see what the difference might be for you.
The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages.
A 15-year mortgage is a smart choice for households in housing markets where price increases have been modest, but a tougher call for households in hotter markets.
The Federal Reserve Board is on track to raise interest rates as soon as today. It’s a move that will mean higher mortgage rates, higher monthly payments, and reduced purchasing power for new borrowers. Homebuyers, who haven’t seen an interest rate increase in nearly 10 years, may be tempted by lower-rate 15-year mortgages. But do the advantages of a 15-year mortgage outweigh the costs? The answer depends partly on where you live.
We’ve crunched the numbers for the largest U.S. metros, and found that:
With the median US household income, a 30-year mortgage allows homebuyers to purchase 46% more house, but a 15-year mortgage provides triple the paid equity in just 5 years.
Homebuyers in areas where prices have a history of rising will benefit greatly from faster equity-building with a 15-year mortgage.
Buyers in areas with historically slow growing to flat housing prices will benefit less from shorter-term mortgages and potentially more from the borrowing power of a 30-year loan.
The Tradeoffs Between 30- and 15-year Mortgages
In general, 30-year mortgages have three advantages:
Monthly payments are lower
Borrowing power is higher
Tax benefits are greater
The primary advantage of a 30-year mortgage is lower monthly payments. On the median valued U.S. home, a 30-year mortgage comes with a payment that is $320, or 27%, lower than a 15-year mortgage. Lower payments also mean that a borrower’s debt-to-income (DTI) ratio is lower than a 15–year loan. This allows middle class buyers (a household earning the U.S. median income) to borrow $77,000, or 46%, more with a 30-year mortgage than a 15-year. Last, borrowers with a 30-year mortgage can write off nearly $68,000 more than a 15-year mortgage via the mortgage-interest deduction on their federal income taxes.
A 15-year mortgage has three advantages over a 30-year mortgage:
Equity builds faster
Interest rates are lower
Loan term is shorter
The primary advantage of a 15-year mortgage is that a larger share of each monthly payment goes towards paying off the loan principal. After five years (the number of years the average young household moves), equity gained from paying off the loan balance is more than $39,000, or three-times greater with a 15-year mortgage on the median value home. In addition, the 15-year rate is 3.36%, compared with 4.12% for a 30-year note. And over the loan term, borrowers with 15-year mortgages pay just under $40,000 in interest with a 15-year compared to over $107,000 with a 30-year on the median value home.
In Bargain Markets, 15-year Mortgages Are A Homebuyer’s Best Bet For Equity
Home equity can come from three sources: down payment, principal reduction, and home value appreciation. This means that in markets with slow appreciation, a larger share of equity will come from homeowners paying down the loan balance when compared to home value appreciation. In such markets, 15-year loans offer a relatively faster route to building equity.
We’ve identified the 10 markets in the country where, after five years of ownership, homeowners will have the most equity from principal reduction relative to home price appreciation. At the top of the list are markets exclusively in the Bargain Belt (Midwest and Southeast). In each of these markets, 15-year mortgages can provide over twice the equity relative to home price appreciation. For example, homeowners in Dayton, Ohio, can earn $22,018 in equity from mortgage payments with a 15-year mortgage, which is 2.37-times greater than the $9,295 gained from price appreciation. With a 30-year mortgage, payments would net households just $7,393. Clearly, household in these markets would gain much more equity by paying down their mortgage principle with a 15-year loan than from home value appreciation.
Markets where Principal Repayment is Key to Equity Growth
5-year Equity from Principal Repayment, 15-year
5-year Equity from Principal Repayment, 30-Year
5-year Equity from Home Value Appreciation
5-year Principal Repayment Relative to Appreciation, 15-year*
5-year Principal Repayment Relative to Appreciation, 30-year
In Pricey Markets, 15-year Mortgages Are A Tougher Call
In markets with strong home price appreciation, deciding between a 15-year and 30-year mortgage is a tougher call. Like bargain markets, 15-year loans provide more equity from principal repayment than from appreciation. The difference, however, is much smaller. In pricey San Francisco and San Jose, Calif., 15-year mortgages provide just 1.35 times more equity from principal payoff than appreciation. Still, the difference in equity from principal repayment is great between a 30-year and a 15-year mortgage. For example, households in Orange County would stand to gain nearly $100,000 more in equity after 5 years by choosing a 15-year mortgage.
Markets where Appreciation Drives Equity Growth
5-year Equity from Principal Repayment, 15-year
5-year Equity from Principal Repayment, 30-Year
5-year Equity from Home Value Appreciation
5-year Principal Repayment Relative to Appreciation, 15-year
5-year Principal Repayment Relative to Appreciation, 30-year
Even though 15-year mortgages provide more equity through loan repayment than appreciation, they also come at the expense of borrowing power. In high-priced markets, the difference in nominal terms can be substantial. For example, middle class families in San Francisco (households making the median income of $104,000 per year) could purchase a $628,000 home with a 30-year mortgage but only a $430,000 home with a 15-year. This makes house hunting hard when the median priced home costs more than $1 million. As a results, this could be the difference between buying their dream-home or a starter for some households.
To show why households in expensive housing markets have a much tougher decision, we’ve put together a scatterplot of median home values for each of the 100 largest U.S. metros and matched it with the relative amount of equity a household can gain from payments on a 15-year mortgage. As you can see, households in cheaper markets (bottom axis) stand to gain relatively more equity (left axis) from paying down their mortgage with a 15-year note than through home value appreciation when compared to pricier markets. For example, households in affordable Cleveland, which has a median home value of $123,000, can reap 2.25 times the equity from loan repayment than appreciation. In San Francisco, the land of million dollar homes, the added value is only 1.34 times the equity.
The takeaway: 15-year mortgages are a great option for those wanting to build equity, regardless of how expensive or how fast growing a market is. However, in places with historically low appreciation, 15-year mortgages are a much better deal for building equity because it’s about the only way to do so though paying of the loan balance. On the other hand, in areas with historically high price appreciation that also happen to be expensive, households need to consider the tradeoffs between the borrowing power of 30-year mortgages, expected equity from home price appreciation, and whether or not they will use equity from their existing home as a down payment on their next one.
To compare 30- and 15-year mortgages, we estimate the amount of equity a household would gain from both appreciation and from paying off the principal after 5-years of homeownership of the median valued home. We estimate this separately for each of the 100 largest U.S. metros, and use an annualized 20-year Federal Housing Finance Administration (FHFA) house price growth rate to project home values 5 years into the future. Last, we compare the nominal and relative amount of equity a household would gain by choosing either a 30- or 15-year mortgage and comparing that to the expected gain in equity from home value appreciation.
Are you a millennial? Do you worry about money? If you answered yes to both of those questions there are a lot of people in a very similar situation. I’ve decided to post this article because there will be a lot of people who will miss out on being able to buy a home because they didn’t plan ahead. People born around 1980 or after are simply more likely to have acquired with more debt (personal & societal), and less opportunity to grow financial wealth.
Now, before you get too scared it’s good to remember that we live in the wealthiest country in the world, and if you like me live in Oklahoma you live with a real estate market that doesn’t fluctuate very much, and homes tend to retain their value more than other parts of the country even in the midst of economic woes. So, if you are still reading this, and you answered yes to the first 2 questions then it’s time to start planning. Buying a home is one of the best ways for a middle class person/family to retain wealth. If you are interested in someday buying a home I would recommend starting with programs/apps like Mint.com (to take control of your finances), CreditKarma.com (so you won’t have any surprises when the time comes), and connect with a lender who can help you budget based on what you are likely to be approved for on a home loan.
Finally, I feel that I must say that if you are interested in having more money in the long term and you want to buy a home it would be wise to buy a home that is more affordable in the short term. This is mostly due to the amount of interest that you would otherwise pay on having a larger loan. If you would like for me to explain any of this further please feel free to contact me.
TO some, millennials — those urban-dwelling, ride-sharing indefatigable social networkers — are engaged, upbeat and open to change. To others, they are narcissistic, lazy and self-centered.
I’m in the first camp, but regardless of your opinion, be fretful over their economic well-being and fearful — oh so fearful — for their prospects. The most educated generation in history is on track to becoming less prosperous, at least financially, than its predecessors.
They are faced with a slow economy, high unemployment, stagnant wages and student loans that constrict their ability both to maintain a reasonable lifestyle and to save for the future.
Longer term, rising federal debt payments and increased spending on Social Security and Medicare will inflict a tremendous financial burden on them, threatening their own prospect of receiving promised retirement benefits.
To a considerable extent, that’s the fault of my generation, the baby boomers. We were the children of the Greatest Generation, but we may also be the most irresponsible generation.
Americans between 18 and 34 are earning less today (after adjustment for inflation) than the same age group did in the past. A typical millennial averaged earnings of $33,883 (in 2013 dollars) between 2009 and 2013. That was down 9.3 percent (after adjustment for inflation) in just a decade and is the lowest since 1980. Older Americans have fared considerably better; earnings of all full-time workers were roughly flat between 2000 and 2011.
Still more striking is that millennials have endured falling earnings even though they have attended college in record numbers.
So what’s going on? A major reason is the recession. Those who graduate in weaker economic times typically earn less than those who enter the work force during more robust periods. Starting behind often means never catching up.
Millennials who didn’t attend college have found their wages particularly squeezed, perhaps because of the decline of middle-skilled jobs in sectors like manufacturing, a clear consequence of globalization.
The wealth of millennials has been hit even harder than their incomes. Their median net worth was just $10,400 as of 2013, down 43 percent from the $18,200 that Gen Xers had in 1995 when they were under 35. With incomes squeezed, millennials are not only not saving much; they are dipping into whatever savings they do have.
That’s worrisome when combined with weak incomes and low net worths. Millennials also participate less frequently in 401(k) plans and, scarred by the recession, invest less and keep more than half their money in cash — not a great long-term strategy.
Another huge drag on the finances of younger Americans is the mountain of student debt that has been piled up in recent years. Members of this year’s graduating class left their campuses owing an average of $35,051, about twice the levels borne by their counterparts two decades earlier (after adjusting for inflation).
That’s in large part because college is becoming less affordable even as it has become increasingly necessary. Since 1993, average tuition has risen by 234 percent, far above the 63 percent overall inflation rate.
Saddled with debt and thin paychecks, millennials are delaying purchasing cars and new homes, low mortgage rates notwithstanding. By June of this year, homeownership among Americans under 35 fell to 34.8 percent, down from a high of 43.6 percent in 2004.
Some of this may be cultural — younger Americans seem less interested in major possessions like cars and homes. But they are also delaying marriage and having children, which I believe is an indicator of strapped finances.
Just to complete a dismal picture, millennials will also be the victims of the irresponsible fiscal policies pursued in large part by members of my generation. The massive budget deficits of recent years and projected needs to meet future obligations to retirees will result in a steady increase in federal debt, from less than 80 percent of gross domestic product today to an estimated 181 percent of G.D.P. by 2090.
Rising national debt levels may threaten the ability of millennials to collect on promised Social Security and Medicare benefits. That’s not lost on millennials — only 45 percent expect to receive Social Security benefits during retirement (compared with 68 percent of baby boomers).
We can’t completely undo the financial obstacles younger Americans face, such as their weak earnings. But we can start to put in place policies that will ease their burden. First and foremost would be to get the nation’s economy onto a stronger growth trajectory.
That’s a daunting challenge that would require revamping federal outlays to emphasize areas like education, infrastructure and research and development. Spending more on these areas would require higher taxes on my generation, which is getting a lot more from government than we are paying into it.
As part of redressing this imbalance, we need to reform the entitlement programs, for example, by reducing Social Security benefits for the highest income Americans. And important steps could be taken to both ease the burden of student debt for those who have already graduated and provide less expensive college opportunities for the rising generation.
Let’s at least start with a greater acknowledgment of the plight of millennials and the role that we — in many cases, their parents — played in creating it.
For several years I found that this topic was too “controversial” to bring up in a professional or even in a personal setting sometimes in Oklahoma. With so much of our industry being based around the energy sector I found that people just really didn’t want to talk about this. To be frank, this rhetoric seemed to be coming out of the far left, and we are a very (perhaps the most) conservative state. However, over the last few years it seems that Oklahomans regardless of political ideology have found themselves becoming more and more afraid that this storyline that came from the liberal media might actually have a leg to stand on – but ironically a less stable ground for that leg to stand and build homes on.
As I am no expert on seismology, or plate tectonics, or energy that isn’t coffee, I will refrain from too much speculation on what exactly is happening. With that said, I do know that I have been hearing on a regular basis in the Real Estate industry that we have a problem on our hands, and that insurance companies are declaring these quakes to be man-made and thus homeowners are likely to have no options of insurability against them… Most of my friends, family, clients (who are also my friends) seem to avoid politics and their dirty influences altogether – but potentially facing foundation problems that they won’t be insurable might be something worth at least having a conversation about. Having been a part of renovating and buying/selling houses over the last few years I can say that one of the big ticket items that has caused a lot of people to spend money that they aren’t able to get back on resale is foundation repair – buyers assume that the house wouldn’t be sinking into the earth, but maybe that will be changing in Oklahoma…
Again, I am not intending to lead a revolution, but the lack of a meaningful conversation has caused me to ask what I’m going to do when my home has damage, or whether or not this could affect my job security. I feel like the risk of tornadoes is plenty to worry about, and many homes are adding tornado shelters, so I’d really prefer that we not have to deal with earthquakes if we don’t have to… Since I’m not the expert on earthquakes maybe I’ll just keep trying to read and converse with others about what should happen, but I am not sure that most of us can afford to wait much longer on this conversation about needed changes to begin. If you know something that I don’t know about this please do fill me in.
Late on a Saturday evening in November 2011, Sandra Ladra was reclining in a chair in her living room in Prague, Oklahoma, watching television with her family. Suddenly, the house started to shake, and rocks began to fall off her stone-faced fireplace, onto the floor and into Ladra’s lap, onto her legs, and causing significant injuries that required immediate medical treatment.
The first tremor that shook Ladra’s home was a magnitude-5.0 earthquake, an unusual event in what used to be a relatively calm state, seismically speaking. Two more struck the area over the next two days. More noteworthy, though, are her claims that the events were manmade. In a petition filed in the Lincoln County District Court, she alleges that the earthquake was the direct result of the actions of two energy companies, New Dominion and Spress Oil Company, that had injected wastewater fluids deep underground in the area.
Ladra’s claim is not as preposterous as it may seem. Scientists have recognized since the 1960s that humans can cause earthquakes by injecting fluids at high pressure into the ground. This was first established near Denver, Colorado, at the federal chemical weapons manufacturing facility known as the Rocky Mountain Arsenal. Faced with the thorny issue of how to get rid of the arsenal’s chemical waste, the U.S. Army drilled a 12,044-feet-deep disposal well and began routinely injecting wastewater into it in March 1962.
Less than seven weeks later, earthquakes were reported in the area, a region that had last felt an earthquake in 1882. Although the Army initially denied any link, when geologist David Evans demonstrated a strong correlation between the Arsenal’s average injection rate and the frequency of earthquakes, the Army agreed to halt its injections.
Since then direct measurements, hydrologic modeling, and other studies have shown that earthquakes like those at the Rocky Mountain Arsenal occur when injection increases the fluid pressure in the pores and fractures of rocks or soil. By reducing the frictional force that resists fault slip, the increased pore pressure can lubricate preexisting faults. This increase alters the ambient stress level, potentially triggering earthquakes on favorably oriented faults.
Although injection-induced earthquakes have become commonplace across broad swaths of the central and eastern U.S over the last few years, building codes—and the national seismic hazard maps used to update them—don’t currently take this increased hazard into account. Meanwhile, nagging questions—such as how to definitively diagnose an induced earthquake, whether manmade quakes will continue to increase in size, and how to judge whether mitigation measures are effective—have regulators, industry, and the public on shaky ground.
Surge in Seismicity
The quake that shook Ladra’s home is one example of the dramatic increase in seismicity that began across the central and eastern U.S. in 2001. Once considered geologically stable, the midcontinent has grown increasingly feisty, recording an 11-fold increase in the number of quakes between 2008 and 2011 compared with the previous 31 years, according to a study published in Geologyin 2013.
The increase has been especially dramatic in Oklahoma, which in 2014 recorded 585 earthquakes of magnitude 3.0 or greater—more than in the previous 35 years combined. “The increase in seismicity is huge relative to the past,” says Randy Keller, who retired in December after serving for seven years as the director of the Oklahoma Geological Survey (OGS).
Yesterday, Oklahoma finally acknowledged that the uptick in earthquakes is likely due to wastewater disposal. “The Oklahoma Geological Survey has determined that the majority of recent earthquakes in central and north-central Oklahoma are very likely triggered by the injection of produced water in disposal wells,” the state reported on a new website. While the admission is an about-face for the government, which had previously questioned any link between the two, it doesn’t coincide with any new regulations intended to stop the earthquakes or improve building codes to cope with the tremors. For now, residents of Oklahoma may be just as vulnerable as they have been.
*This live-updated map shows all earthquakes magnitude 2.5 and greater for the last 30 days.
This surge in seismicity has been accompanied by a spike in the number of injection wells and the corresponding amount of wastewater disposed via those wells. According to the Railroad Commission of Texas, underground wastewater injection in Texas increased from 46 million barrels in 2005 to nearly 3.5 billion barrels in 2011. Much of that fluid has been injected in the Dallas area, where prior to 2008, only one possible earthquake large enough to be noticed by people had occurred in recorded history. Since 2008, the U.S. Geological Survey (USGS) has documented over 120 quakes in the area.
The increase in injection wells is due in large part to the rapid expansion of the shale-gas industry, which has unlocked vast new supplies of natural gas and oil that would otherwise be trapped in impermeable shale formations. The oil and gas is released by a process known as fracking, which injects a mix of water, chemicals, and sand at high enough pressure to fracture the surrounding rock, forming cracks through which the hydrocarbons, mixed with large volumes of fluid, can flow. The resulting mixture is pumped to the surface, where the hydrocarbons are separated out, leaving behind billions of gallons of wastewater, much of which is injected back underground.
Many scientists, including Keller, believe there is a correlation between the two increases. “It’s hard to look at where the earthquakes are, and where the injection wells are, and not conclude there’s got to be some connection,” he says. Rex Buchanan, interim director of the Kansas Geological Survey (KGS), agrees there’s a correlation for most of the recent tremors in his state. “Certainly we’re seeing a huge spike in earthquakes in an area where we’ve also got big disposal wells,” he says. But there have been other earthquakes whose cause “we’re just not sure about,” Buchanan says.
Diagnosing an Earthquake
Buchanan’s uncertainty stems in part from the fact that determining whether a specific earthquake was natural or induced by human activity is highly controversial. Yet this is the fundamental scientific question at the core of Ladra’s lawsuit and dozens of similar cases that have been filed across the heartland over the last few years. Beyond assessing legal liability, this determination is also important for assessing potential seismic hazard as well as for developing effective methods of mitigation.
One reason it’s difficult to assess whether a given earthquake was human-induced is that both types of earthquakes look similar on seismograms; they can’t be distinguished by casual observation. A second is that manmade earthquakes are unusual events; only about 0.1 percent of injection wells in the U.S. have been linked to induced earthquakes large enough to be felt, according to Arthur McGarr, a geologist at the USGS Earthquake Science Center. Finally, scientists have comparatively few unambiguous examples of induced earthquakes. That makes it difficult to create a yardstick against which potential “suspects” can be compared. Like a team of doctors attempting to diagnose a rare disease, scientists must examine all the “symptoms” of an earthquake to make the best possible pronouncement.
To accomplish this, two University of Texas seismologists developed a checklist of seven “yes” and “no” questions that focus on four key characteristics: the area’s background seismicity, the proximity of an earthquake to an active injection well, the timing of the seismicity relative to the onset of injection, and the injection practices. Ultimately, “if an injection activity and an earthquake sequence correlate in space and time, with no known previous earthquake activity in the area, the earthquakes were likely induced,” wrote McGarr and co-authors inScience earlier this year.
*waste arrives by tanker truck at a wastewater disposal facility near Platteville, Colorado.
These criteria, however, remain open to interpretation, as the Prague example illustrates. Ladra’s petition cites three scientific studies that have linked the increase in seismicity in central Oklahoma to wastewater injection operations. ACornell University-led study, which specifically examined the earthquake in which Ladra claims she was injured, concluded that event began within about 200 meters of active injection wells—closely correlating in space—and was therefore induced.
In a March 2013 written statement, the OGS had concluded that this earthquake was the result of natural causes, as were two subsequent tremors that shook Prague over the next few days. The second earthquake, a magnitude-5.7 event that struck less than 24 hours later, was the largest earthquake ever recorded in Oklahoma.
The controversy hinged on several of the “symptoms,” including the timing of the seismicity. Prior to the Prague sequence, scientists believed that a lag time of weeks to months between the initiation of injection and the onset of seismicity was typical. But in Prague, the fluid injection has been occurring for nearly 20 years. The OGS therefore concluded that there was no clear temporal correlation. By contrast, the Cornell researchers decided that the diagnostic time scale of induced seismicity needs to be reconsidered.
Another key issue that has been raised by the OGS is that of background seismicity. Oklahoma has experienced relatively large earthquakes in the past, including a magnitude-5.0 event that occurred in 1952 and more than 10 earthquakes of magnitude 4.0 or greater since then, so the Prague sequence was hardly the first bout of shaking in the region.
The uncertainty associated with both these characteristics places the Prague earthquakes in an uncomfortable middle ground between earthquakes that are “clearly not induced” and “clearly induced” on the University of Texas checklist, making a definitive diagnosis unlikely. Meanwhile, the increasing frequency of earthquakes across the midcontinent and the significant size of the Prague earthquakes are causing scientists to rethink the region’s potential seismic hazard.
Is the Public at Risk?
Earthquake hazard is a function of multiple factors, including event magnitude and depth, recurrence interval, and the material through which the seismic waves propagate. These data are incorporated into calculations the USGS uses to generate the National Seismic Hazard Maps.
Updated every six years, these maps indicate the potential for severe ground shaking across the country over a 50-year period and are used to set design standards for earthquake-resistant construction. The maps influence decisions about building codes, insurance rates, and disaster management strategies, with a combined estimated economic impact totaling hundreds of billions of dollars per year.
When the latest version of the maps was released in July, the USGS intentionally excluded the hazard from manmade earthquakes. Part of the reason was the timing, according to Nicolas Luco, a research structural engineer at the USGS. The maps are released on a schedule that dovetails with building code revisions, so they couldn’t delay the charts even though the induced seismicity update wasn’t ready, he says.
Such changes, however, may take years to implement. Luco notes that the building code revisions based upon the previous version of the USGS hazard maps, released in 2008, just became law in California in 2014, a six-year lag in one of the most seismically-threatened states in the country.
Instead, the USGS is currently developing a separate procedure, which they call a hazard model, to account for the hazard associated with induced seismicity. The new model may raise the earthquake hazard level substantially in some parts of the U.S. where it has previously been quite low, according to McGarr. But there are still open questions about how to account for induced seismicity in maps of earthquake shaking and in building codes, Luco says.
McGarr believes that the new hazard calculations will result in more rigorous building codes for earthquake-resistant construction and that adhering to these changes will affect the construction as well as the oil, gas, and wastewater injection industries. “Unlike natural earthquakes, induced earthquakes are caused by man, not nature, and so the oil and gas industry may be required to provide at least some of the funds needed to accommodate the revised building codes,” he says.
But Luco says it may not make sense to incorporate the induced seismicity hazard, which can change from year to year, into building codes that are updated every six years. Over-engineering is also a concern due to the transient nature of induced seismicity. “Engineering to a standard of earthquake hazard that could go away, that drives up cost,” says Justin Rubinstein, a seismologist with the USGS Earthquake Science Center. A further complication, according to Luco, is that building code changes only govern new construction, so they don’t upgrade vulnerable existing structures, for which retrofit is generally not mandatory.
The occurrence of induced earthquakes clearly compounds the risk to the public. “The risk is higher. The question is, how much higher?” Luco asks. Building codes are designed to limit the risk of casualties associated with building collapse—“and that usually means bigger earthquakes,” he says. So the critical question, according to Luco, is, “Can we can get a really large induced earthquake that could cause building collapses?”
Others are wondering the same thing. “Is it all leading up to a bigger one?” asks Keller, former director of the OGS. “I don’t think it’s clear that it is, but it’s not clear that it isn’t, either,” he says. Recalling a magnitude-4.8 tremor that shook southern Kansas in November, KGS’ Buchanan agrees. “I don’t think there’s any reason to believe that these things are going to magically stop at that magnitude,” he says.
Coping with Quakes
After assessing how much the risk to the public has increased, our society must decide upon the best way to cope with human-induced earthquakes. A common regulatory approach, one which Oklahoma has adopted, has been to implement “traffic light” control systems. Normal injection can proceed under a green light, but if induced earthquakes begin to occur, the light changes to yellow, at which point the operator must reduce the volume, rate of injection, or both to avoid triggering larger events. If larger earthquakes strike, the light turns red, and further injection is prohibited. Such systems have recently been implemented in Oklahoma, Colorado, and Texas.
But how will we know if these systems are effective? The largest Rocky Mountain Arsenal-related earthquakes, three events between magnitudes 5.0 and 5.5, all occurred more than a year after injection had ceased, so it’s unclear for how long the systems should be evaluated. Their long-term effectiveness is also uncertain because the ability to control the seismic hazard decreases over time as the pore pressure effects move away from the well, according to Shemin Ge, a hydrogeologist at the University of Colorado, Boulder.
Traffic light systems also rely on robust seismic monitoring networks that can detect the initial, very small injection-induced earthquakes, according to Ge. To identify hazards while there is still sufficient time to take corrective action, it’s ideal to identify events of magnitude 2.0 or less, wrote McGarr and his co-authors in Science. However, the current detection threshold across much of the contiguous U.S. is magnitude 3.0, he says.
Kansas is about to implement a mitigation approach that focuses on reducing injection in multiple wells across areas believed to be underlain by faults, rather than focusing on individual wells, according to Buchanan. He already acknowledges that it will be difficult to assess the success of this new approach because in the past, the KGS has observed reductions in earthquake activity when no action has been taken. “How do you tease apart what works and what doesn’t when you get all this variability in the system?” he asks.
This climate of uncertainty leaves regulators, industry, and the public on shaky ground. As Ladra’s case progresses, the judicial system will decide if two energy companies are to blame for the quake that damaged her home. But it’s our society that must ultimately decide how, and even if, we should cope with manmade quakes, and what level of risk we’re willing to accept.