Mortgage companies aren’t financing house sales, but they are refinancing mortgages to the tune of 80 percent of their business. Mortgage interest at near-record lows is an incentive for homeowners to pay less each month or reduce the number of years on their home finance loan via refinancing. Mortgage refinancing involves factors for instance rates of interest and taxes that determine whether or not it’s recommended. Homeowners must also be aware of the long-term effects resulting from the decision between refinancing with a 15-year or 30-year mortgage.
Home finance loan sector stays afloat with refinancing
Homeowners can save thousands by refinancing a home loan. Within the course of a year, lower monthly payments can add up to thousands of dollars in savings. As reported by SmartMoney, more homeowners than ever are attempting to refinance their mortgages. According to the Mortgage Bankers Association, refinancing accounted for 80.5 percent of total mortgage lending. MBA records on refinancing activity from 1990 to 2008 average nearly half that percentage of home finance loan lending. Low home loan rates are fueling the trend. The average rate for a 15-year mortgage was 4.02 percent. A year ago, those rates averaged 5.54 percent and 4.97 percent, respectively.
Making an informed refinancing decision
Some homeowners may be disappointed to learn the savings from refinancing a mortgage don’t pencil out. Saving a worthwhile sum over the life of the home loan should be the primary goal of refinancing. Homeowners need to do the math. First the numbers on closing costs and also the savings per month must be known. Divide closing costs by savings; that shows how many months it takes to break even. For making refinancing worthwhile, homeowners need to remain living within the house long enough for refinancing to pay off. Taxes could also make the amount of savings deceptive. Most mortgage interest is tax deductible; a lot of closing costs aren’t. One more thing: interest costs go way up with a 30-year home loan, although money flow is better after refinancing.
A 30-year mortgage with a 15-year payback
Refinancing with a 15-year loan substantially reduces interest costs. However, Kathy M. Kristof at the Los Angeles Times writes that a shorter-term loan means a higher monthly payment. Some homeowners aren’t that affected by paying more each month. Even so, it’s possible they could reap substantial returns by investing that cash instead. Kristof uses a $300,000 loan as an example. She starts with a 15-year term. The total cost at the end is $399.420. Over 30 years that loan will cost $547,223. But the 30-year home finance loan can offer an advantage. The monthly payment is $700 lower. With the home loan 15-years on, if the homeowner put that $700 a month into a balanced mix of stocks that has demonstrated an average return over 83 years of 9.6 percent, the net would be $270,305. Halfway into the 30-year loan, the proceeds could retire the $198,701 balance. That would leave $80,000 to play with. This strategy 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.
Additional reading
SmartMoney
smartmoney.com
New York Times
newyourktimes.com
Los Angeles Times
latimes.com
