Refinancing: Think 15
Just when you thought interest rates on home mortgages couldn’t get any lower….they did! While economic news has remained dreary, one bright spot is that interest rates on long term mortgages have reached all-time record lows. If you haven’t already, you might think about the savings of a refinance. Regardless of whether you want to refinance or buy, if your goal is long term savings on interest and/or accelerating your equity accumulation, then “Think 15.” Think a 15-year fixed rate that is.
Rates on conventional fixed 15-year loans have breached previous floors set over the past decade. At the beginning of 2001, the average 15-year fixed rate was around 6.74%. In August of 2005, that average had fallen to around 5.38%. Last August the 15-year fixed rate was around 4.58%. For the week ending 8/20/10 the 15-year average sat at 3.90% while the 30-year fixed was as 4.42%. (Source: Mortgage-X.com). A USA Today piece on 8/16 said, “Nearly a third of borrowers refinancing in fixed 30-year loans in April through June picked loans with 15- or 20-year terms, according to mortgage finance giant Freddie Mac.”
To compare savings, assume you have two borrowers each with a loan of $150,000. Borrower John has a 4.25% rate on a 30-year loan and Borrower Jane has 4.25% rate on a 15-year loan. John’s 30-year monthly principal and interest payment is about $738, while Jane’s 15-year fixed payment is approximately $1129 per month. Let’s say at the end of 7 years each sells their home. While John still owes approximately $129,823, Jane’s balance has reduced to $91,697. Jane has almost $40,000 MORE in equity, or LESS in debt depending on how you look at it. (Click here to do your own mortgage comparison online.)
As with any decision involving refinancing, there are a host of factors one must keep in mind to assure they arrive at the best outcome for their situation. Those factors include:
• Cost of the refinance
• The amount of time one expects to remain in the home
• Change to the monthly payment (can you handle an increase in payment from a 30-year to 15-year loan?)
• Other future financial goals/decisions that are on the horizon, such as children going to college, retirement, etc.
If your goal is to own your home sooner rather than later and your budget can handle a slightly higher payment, then a 15-year loan might be the right choice for you.
Written By:
Bruce W. Schultz VP, Mortgage
(918) 293-2798 Office
(918) 688-0663 Mobile
bschultz@spiritbank.com