It’s hard to get a mortgage loan, however home mortgage refinancing currently can make up more than 80 percent of home loan financing. Homeowners looking at such low rates of interest want to refinance in hopes of either improving cash flow with lower payments or saving money over time with shorter or longer terms. Different scenarios have to be considered before a homeowner knows if they’ll really benefit from mortgage refinancing. Plus, deciding whether or not to refinance with a 15-or 30-year mortgage has major long-term financial implications.
with few house sales, refinancing supports loan companies
Homeowners can save thousands by refinancing a mortgage. Within the course of a year, lower monthly payments can add up to thousands of dollars in savings. SmartMoney reports that homeowners are refinancing mortgages in record numbers. The Mortgage Bankers Association tracks the trend. An MBA report said that of all mortgage activity, 80.5 percent was refinancing. The MBA said that is nearly twice the rate of refinancing than what was documented from 1990 to 2008. Low rates on mortgages are fueling the trend. At the exact same time, a 15-year fixed mortgage averaged 4.02 percent. Last September the fixed rates were much higher. A 30-year term came in at 5.54 percent and 4.97 percent for 15-years.
Making an educated refinancing choice
At first glance the savings realized from lower payments seems to be a no-brainer. However, refinancing a home loan does not always work as advertised. Refinancing only is sensible if a net gain in savings in realized when the mortgage is paid off. Homeowners have to do the math. First the numbers on closing costs and also the savings per month must be known. Factoring the monthly payment savings into the total closing costs shows how long it takes to start coming out ahead. Homeowners have to look ahead. Refinancing makes sense if they plan to stay within the house longer than it takes to break even on the closing costs. Sometimes taxes can fool uninformed refinancers. Most mortgage interest is tax deductible; lots of closing costs aren’t. At the very same time, upping cash flow by refinancing with a 30-year mortgage results in more long term interest paid.
A good example for long-term strategy
The clear benefit of 15-year refinancing is lower total interest costs. However the Los Angeles Times’ Kathy M. Kristof writes that a higher monthly payment is a tough pill to swallow. Homeowners who aren’t’ fazed by a higher monthly payment might do well to think about putting the money someplace else. Kristof explains the possibilities using a $300,000 loan. A 15-year mortgage has a total cost of $399,420. The total cost of a 30-year mortgage is $547,223. Yet the monthly payment is $700 less with the 30-year loan. All that monthly savings, pumped into a diverse collection of stocks—with a documented average return going back 83 years of 9.6 percent, would yield $279,305 within 15 years. That’s enough money to pay back the entire mortgage–$198,701—and have an $80,000 profit. Of course, investing in the stock market would be risky, but in this case, it would bring a greater reward than refinancing a 15-year home finance loan.
SmartMoney
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New York Times
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Los Angeles Times
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