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.
Look Beyond the 30-Year Term…
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 in a 30-year mortgage term of some kind.
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. Maybe twice as fast!
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 percent.
Obviously, less than 24 million homeowners still have rates above six percent because they already refinanced (or got foreclosed on), 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 your mortgage 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% 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 reason to refinance a mortgage to save money?
Yes, it is. And sure, your mortgage payment would be slightly higher, roughly $230 a month more than your old payment. That’s certainly not very appealing.
How Does $150,000 in Savings Sound?
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%. Yes, you read that correctly. Go ahead and put your eyeballs back in your head.
[30-year fixed vs. 15-year fixed]
Now, many could argue that this reduces your liquidity and puts more money toward an illiquid asset, but $150,000 is big savings. No one can deny that.
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% percent 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 your home and move on, you’ll probably stick with the mortgage full-term. Or close to it.
Tip: If a 15-year mortgage payment is too much to handle, you can still save a ton of money by refinancing into a new 30-year mortgage at today’s low rates, while simply 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.