The Power of the Mortgage Refinance

The Federal Reserve once again decided on September 21 to hold off on raising interest rates.  That may not help the paltry interest you are receiving on your savings account or bank certificate of deposit, but it is something that can still make – or rather save you some money.

Interest rates on home mortgages remain near all-time lows.  Bankrate.com lists the rate on a 30 year, fixed-rate mortgage refinance at 3.35% and the rate on a 15 year, fixed-rate mortgage refinance at 2.63% as of 9/29/16.  No one can forecast whether rates will go up or down, but it is highly unlikely they will go much lower.  That means now is a good time to consider refinancing.

Consider someone who bought a $200,000 home 10 years ago with 20% down and took out a traditional 30 year mortgage for the remaining $160,000.  If the interest rate on the mortgage was 5.25%, then the payment would be $883.53 a month.  With 20 years left to go on the original loan, they could refinance to a new 20 year term loan with a 3.35% interest rate, drop their payment almost $135 a month to $748.59, have the home paid off in the same amount of time, and save over $32,200 in interest over the course of the loan.

Let’s take this a step further.  The same $160,000, 30 year mortgage at 5.25% with 20 years left to go could be refinanced to a new 15 year mortgage at an even lower interest rate of 2.63% (15 year mortgages generally have lower rates than 20 and 30 year mortgages).  The monthly payment would essentially stay the same at $880.24, but the mortgage would be paid off 5 years earlier and they would recognize over $53,600 IN INTEREST SAVINGS!  This is not pocket change, this is real money.

There are closing costs when refinancing a mortgage that have to be taken into consideration along with other factors such as how long you plan to stay in the home, your credit score, and the amount of equity you have in the home.  Bankrate.com has a good mortgage refinance calculator that can take all the costs into consideration and can be found here:  Bankrate.com

Beyond interest savings, the ability to refinance your mortgage should be seen as another tool in your financial planning toolbox.  It can sometimes make sense to do a cash out refinance and pay off high interest debt with the proceeds.  If you are a few years into paying off your mortgage, you may be able to refinance the loan back out to a new 30 year term to lower the monthly payment and provide some relief in your budget.  Note that this may lead to you actually paying more interest over the term of the loan, but it may be worth it if you are having a hard time paying your bills every month.

The potential interest savings on, and uses for, refinancing your home loan can be powerful.  With rates hovering near all-time lows, it may be time to consult with your financial advisor about how refinancing your home mortgage could benefit you.

Paul Coleman
Paul Coleman