Tim McLaughlin, VP Weichert Financial Services
Last Friday, CNN ran a special documenting the top 10 substantial money saving tips for consumers today.
The number one tip: refinance your mortgage.
Their headline was “Save $50K in 9 years” and they went into great detail to lay out how this could easily be accomplished assuming one qualifies. Being in the business, maybe we are too close to it to see the value at times, but here it is spelled out in detail:
The way to do it is to refinance into a lower rate while simultaneously reducing the payment terms. In this example, you will save 60% more in interest by refinancing into a 15 year mortgage rather than a 30 year term at recent rates (say 4.375% for a 15 year vs. 5.125% for a 30 year loan). Note your monthly payments will also rise, but you will pay back more of the principal over a shorter term, thus capitalizing on a lower rate and reducing your principal balance in a much shorter timeline.
In this example, on a $280,000 refinance of a 30 year loan with 25 years left on it, your payments would rise $260 a month but you would save nearly $175,000 in interest and pay off your mortgage a decade sooner.
This strategy is very effective “if your current rate is above 5% and you don’t expect to move for at least three years…it pays to make an inquiry with your lender,” says Frank Nothaft, chief economist for Freddie Mac.
Albeit, there are some questions related to this. One, can you qualify, and do you have enough equity? Many times borrowers will not pursue this strategy because they are not sure, or because it just doesn’t make sense to investigate. This is a very simple process, and your Weichert Financial Gold Services Manager can help you analyze this. Second, not sure if you can swing the higher payment? There are other alternatives; for instance, look instead at a 20 year loan, which will get you close to the goal. At recent rates around 4.875%, you’ll save $44,000 over 10 years on that $280,000 refi and $115,000 over the life of the loan, while cutting your monthly payments by $18, in the scenario detailed above.
The second step is making the decision that you can “invest” an additional $200 to $300 a month in a 15 year or 20 year mortgage to reduce the term of your loan and to deeply reduce your interest payment life of loan. But the first step, again, is to talk to your Weichert Gold Services Manager to understand the refinance trade option and get all the details.