With interest rates at record lows, many people are refinancing. It is not the refinance frenzy we experienced in the run-up prior to the bursting of the real estate bubble. Back then, people were refinancing to buy cars and pay for vacations and pay off credit card debt and so on. While that still goes on to an extent, today's refinancing is usually about reducing mortgage payments or paying off the mortgage quicker.
Many have taken advantage of rates in the low 3% range to trade in what's left on a 30 year mortgage for a more rapidly amortized 15 year loan. This is often a great idea. For example, suppose you have 25 years left on your $200,000, 30 year mortgage at 4.5%. Your P & I payment is $1,013 and the current balance is about $182,000. Today, 15 year mortgage rates are as low as 3.3%, so refinancing that $182,000 balance would produce a payment of $1,283 ($270 more a month) but would pay your mortgage off 10 years sooner! You'd also be saving more than $72,021 in interest over what you'd pay if you kept the 30 year loan until paid off.
For many, there is an alternative to refinancing that produces a similar result. If your lender agrees, paying more than your regularly scheduled house payment can also reduce the term of your loan. While this option is available on most mortgages, I have on rare occasions seen loans that specifically prohibited it, so be sure to check with your lender before beginning. But let's look at that same situation again. Rather than refinancing the $200,000 mortgage for 15 years, let's just start adding an additional $270 to each monthly payment. The loan will be paid off 8 years and 2 months early: not quite the 10 years refinancing would produce, but still very good. Interest savings would also be almost $60,000.
The benefit of adding to your payment rather than refinancing is that you have no closing costs associated with a new loan. Also, that additional $270 you're adding to your payment? It's your option. If you have a period where you need that money for something else, you don't have to send it in. You don't have that luxury if you refinance.
You mortgage is an important aspect of your financial life, one that needs to be managed for optimal benefit. If you are considering a refinance or are just curious about your options, we at GreatNest would be happy to go over them with you. For a free, comprehensive analysis, call us today at: (336) 790-5210