Refinance Your Mortgage To Help Meet Your Goals
By Rob Wrubel, CFP®, AIF®
Mortgage rates keep coming down. It seems impossible that it could happen as they have now been low for so long but it keeps happening. Last week, I saw a 30 year fixed rate at 3.875%. Bankrate.com shows a 15 year rate at 3.16%. Unbelievable.
At Cascade, we take a comprehensive approach to working with clients to help them achieve life goals through financial planning, saving and investing. Your ability to save over time or reduce expenses for major purchases can make a significant difference in your planning. Low rates could help you purchase a dream home, second home or make improvements to your existing home. Low rates can help homeowners stay in their current residences for years to come.
Low rates can help you add additional money to investments or free up income to pay for life experiences and expenses. The difference between a 5.5% interest rate for 30 years versus a 3.875% interest rate adds up to some serious money over time. This is money that you can use to invest and grow if you are in the accumulation stage or to spend and reduce outflows from investment accounts if you are in the distribution phase of life.
Right now, I think every homeowner with a loan that has not been started or refinanced recently should take a serious look at refinancing. Rates are extremely low. There is political willpower to keep rates low right now but that could change soon.
Of course, some people are underwater and the mortgage remains higher than the home’s value. This is not as common in some areas, like Colorado, as it is in parts of Arizona, California, Nevada and Florida. For those underwater, there is hope. The Federal government and five major banks recently announced a $25 billion dollar settlement aimed at people underwater. The details have not been finalized but it looks like relief will come in the form of restructured loans, reduced balances or cash payments.
The math works out fairly easily for those that can refinance. Assume a home that is worth $500,000 with an initial mortgage value of $400,000 (20% was put towards the down payment). This mortgage interest rate was initially 5.5%. The payment for 30 years works out to $2,271.16 per month.
After five years, the principal balance on this loan is now $369,842.41. Mortgages pay higher amounts to interest in the first few years and less towards principal. The same loan, if carried out for 15 years would now have a remaining principal amount of $277,958.88.
For the person five years into the loan, a refinance would save $532.02 per month. That is almost a 25% savings each month. That money can also add up quickly to someone looking to save for the long term. The savings works out to $6,384 per year. This annual savings invested at 8% compounded over 30 years would grow to over $781,000.
The homeowner 15 years into the loan could benefit from the refinance as well. In the case above, the homeowner would restart a new 15 year loan at their current principal balance remaining – the $277,958.88. The savings would not be as high as the 30 year but the decrease would still amount to $232.50 – a significant savings and money that could be used for other life purchases – dinners out, movies, funding children and grandchildren’s education accounts, rounds of golf and more.
Refinances typically do involve some upfront expenses: points and/or origination fees, title work, legal work in some states and an appraisal. Typically, it does not make sense to pay these fees and refinance if you expect to move within a year or two. I recommend getting out the calculator and determining how long it might be before you would get your money back. For instance, you might have to pay around $3,000 in closing costs (just a guess). If you save $500 per month then you have paid yourself back in six months. I would probably take that. If it takes 18 months then I might just wait, especially if I am thinking about moving. There is no sense to paying fees and expenses for something that will not add lasting value.
Mortgage interest is currently deductible and low rates make the tax break even more attractive. At 3.875%, the after tax effective rate for someone paying 35% in taxes comes out to about 2.5%. Now, I am not one to recommend increasing a mortgage or taking on additional debt because interest rates are so low. I am just pointing out how attractive it is right now to borrow money to own a house that you get to live in today and hope will appreciate more than 2.5% or 3.875% into the future.
We do not place mortgages here at Cascade Investment Group. We do help people think through and review their planning decisions – including mortgages, investments, income generation, insurance and their significant planning issues. Feel free to call us today if you would like some help to see whether or not it might be a good time to review your mortgage – and how to decide what to do with your savings from the refinance.
Rob Wrubel is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.