A lower interest rate often means a lower monthly payment if the terms of the refinanced mortgage are the same as the original mortgage. Depending on your credit rating, 30-year mortgage rates have been between 3.5 percent and 4 percent for several weeks. While not the lowest we’ve seen, mortgage rates are still well below the 6 percent level from five years ago. For example, if you purchased a home five years ago, and your current loan payoff is $200,000 at a fixed rate of 6 percent, your monthly payment is around $1,288, before property taxes and insurance. If you were able to refinance that mortgage at 3.5 percent over 30 years, it should lower your monthly payment to $898.09. Thus, you decrease your cash outflow by more than $4,600 each year.
With the decrease in home values since 2009, many homeowners have been unable to refinance because they have little or no equity. The Home Affordable Refinance Program , which began in 2009, was designed to help those who are current on their mortgage payments but have been unable to get traditional refinancing because the value of their home has declined. Recent changes to HARP allow lenders to roll in loan-origination fees or closing costs, which can help with your cash flow. A mortgage lender should be able to run numbers for you to show you what should work best for your situation, given your loan balance and credit score.
Some homeowners might opt for a shorter loan term instead of lower payments. If you use the shorter term, you pay your mortgage off earlier. Other homeowners may consider refinancing to restructure or consolidate debt. Saving on your monthly mortgage might provide enough extra cash to pay down car loans, credit card debt, or other loans that do not qualify for a tax deduction. Another option is to use the savings for your retirement account.
Let’s do a little more math. In our previous example, refinancing at a lower rate saved you approximately $390 a month. Let’s assume you are able to invest $390 every month for 25 years. Assuming a conservative, annualized stock market return of 8.5 percent, through compounded interest and diligent investing, you should have a nest egg of approximately $403,060 in 25 years. You could pay off the approximately $50,000 left on your now five-year mortgage and have about $350,000 left in your saving account.
While this is a hypothetical scenario, the point is that by refinancing your mortgage, you can take control of how your money works for you. Also consider the last time home values significantly outpaced inflation, it was called a bubble. And like most bubbles, it burst.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The Cherokee Tribune will periodically publish columns from KSU business faculty.