Mortgage are rare these days. However, refinancing a mortgage accounts for 80 percent of home finance loan lending at the present time. Interest rate reductions spur refinancing for homeowners looking for a chance to conserve money on their mortgages via lower payments or shorter terms. Whether they succeed accomplishing that with mortgage refinancing depends on such factors as rates of interest and taxes. Plus, deciding whether or not to refinance with a 15-or 30-year mortgage has major long-term financial implications.
Mortgage financial institutions based on refinancing
By refinancing a mortgage, a homeowner can conserve thousands of dollars in home finance loan payments each year. SmartMoney reports that homeowners are refinancing mortgages in record numbers. The Mortgage Bankers Association tracks the trend. An MBA report said that of all mortgage activity, 80.5 percent was refinancing. MBA records on refinancing activity from 1990 to 2008 average nearly half that percentage of home finance loan lending. Low personal property rates are fueling the trend. A 15-year fixed mortgage averaged 4.02 percent on the exact same date. A year ago, those rates averaged 5.54 percent and 4.97 percent, respectively.
Deciding to refinance a mortgage
At first glance the savings realized from lower payments seems to be a no-brainer. However, refinancing a home loan does not always work as advertised. Refinancing only is sensible if a net gain in savings in realized when the mortgage is paid off. Homeowners need to do the math. First the numbers on closing costs and the savings per month must be known. The time span for breaking even is determined by dividing closing costs by the amount saved on payments per month. For making refinancing worthwhile, homeowners need to remain living in the house long enough for refinancing to pay off. Taxes could also make the amount of savings deceptive. The amount paid on home finance loan interest subtracts from taxes owed, while most closing costs don’t. Plus, refinancing with a 30-year mortgage may improve monthly cash flow, but increase long-term interest costs substantially.
A creative refinancing choice
Refinancing with a 15-year loan substantially reduces interest costs. But the Los Angeles Times’ Kathy M. Kristof writes that a higher monthly payment is a tough pill to swallow. Some homeowners aren’t that affected by paying more each month. Even so, it is possible they could reap substantial returns by investing that money instead. Kristof explains the possibilities using a $300,000 loan. A 15-year mortgage has a total cost of $399,420. A 30-year mortgage: $547,223. However the 30-year mortgage can offer an advantage. The monthly payment is $700 lower. If that money were invested in a diversified portfolio of stocks that has averaged a 9.6 percent return over the last 83 years, it would be worth $279,305 after 15 years. That’s enough money to settle the entire mortgage–$198,701—and have an $80,000 profit. This method involves a certain degree of risk, but it offers at the very least a chance to come out much further ahead than refinancing a 15-year home finance loan and standing pat.
Further reading
SmartMoney
smartmoney.com
New York Times
newyourktimes.com
Los Angeles Times
latimes.com
