Assuming you’re not living under a rock or some other inanimate object, you’ve probably noticed that mortgage rates are pretty low.
By pretty low, I mean at or near their all-time historical lows, which go back years and years (and years).
And so if you’ve currently got a home loan (and some home equity; that’s pretty important), you may be wondering if you can take advantage of this rare, if not once-in-a-lifetime opportunity.
Most homeowners are likely already in 30-year fixed-rate mortgages, or perhaps hybrid adjustable-rate mortgages, such as the 5/1 ARM or the 7/1 ARM, which are fixed for the first five and seven years, respectively, before becoming adjustable for the remaining term.
Either way, they’re likely tied to a 30-year mortgage term.
That spells opportunity. Why? Because rates are so low now that not only can you snag a better rate, but you may even be able to go with a shorter term product and save a ton in interest without breaking the bank. Oh, and pay your mortgage off much faster.
Take for example the Census Bureau’s 2009 American Housing Survey, which revealed that 24.1 million first mortgages had an interest rate above six per cent.
Obviously, less than 24 million homeowners still have rates above six per cent, because they already refinanced (or foreclosed), but I’m sure there are still several million that do…
And this clearly means millions of homeowners could save on their monthly mortgage payments; it’s pretty much a no-brainer.
But refinancing from a 30-year term to another 30-year term isn’t the only way to save. It’s just the obvious way to “save.”
Let’s break it down, using a typical real world scenario:
Loan amount: $300,000
Current 30-year mortgage rate: 6.50%
15-year refinance rate: 3.375%
30-year refinance rate: 4.375%
If your interest rate is currently 6.50 per cent on a 30-year loan, you’d have a monthly mortgage payment $1,896.20.
Assuming you refinanced to a 15-year fixed at today’s low, low, low, low rates, you’d have a monthly payment of $2,126.28.
What gives? Why would I refinance into a higher monthly payment? Isn’t the point of refinancing to save money?
Yes, it is. And sure, your mortgage payment would be slightly higher, roughly $230 a month more than your old payment.
But if you’re in a decent financial position, you’d save over $150,000 in interest over the 15-year term as compared to the 30-year at 4.375 per cent.
Now, many could argue that this reduces your liquidity and puts more money toward an illiquid asset, but $150,000 is big savings.
And if you’re not into investing in the stock market or elsewhere, your money is probably better served going toward the mortgage than it is a savings account with a 1% per cent yield (or less).
There’s also a good chance the rate you snag today will be the lowest for a long, long time. So unless you sell, you’ll probably stick with it full-term.
Tip: If a 15-year mortgage payment is too much to handle, you can still save a ton by refinancing into a new 30-year mortgage at today’s low rates, while making your old monthly payment.
So you’d have the option of paying $1,497.86 per month, or the old $1,896.20.
That will shed a ton of interest over the life of loan as well, and give you the option to hold onto your money if and when needed.
This post originally appeared on The Truth About Mortgage blog.
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