Home loan are rare these days. Nevertheless, home mortgage refinancing accounts for 80 percent of mortgage lending at the present time. Rate of interest reductions spur refinancing for homeowners looking for a chance to save cash on their mortgages through lower payments or shorter terms. Mortgage refinancing includes factors such as interest rates and taxes that determine whether or not it is a good idea. Plus, deciding whether or not to refinance with a 15-or 30-year mortgage has major long-term financial implications.
Mortgage companies depending on 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. An article in SmartMoney on the phenomenon said the amount of homeowners choosing to refinance mortgages has gone via the roof. According to the Mortgage Bankers Association, refinancing accounted for 80.5 percent of total mortgage lending. The MBA said that is nearly twice the rate of refinancing than what was documented from 1990 to 2008. 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 educated refinancing decision
At first glance the savings realized from lower payments seems to be a no-brainer. Nevertheless, refinancing a home loan does not always work as advertised. Saving a worthwhile sum over the life of the home finance loan should be the primary goal of refinancing. Key numbers within the equation that need to be nailed down are closing costs and monthly savings. Divide closing costs by savings; that shows how numerous months it takes to break even. Homeowners need to look ahead. Refinancing is sensible if they plan to remain within the house longer than it takes to break even on the closing costs. Taxes will always complicate a situation also. Most mortgage interest is tax deductible; a lot of closing costs aren’t. At the same time, upping money flow by refinancing with a 30-year home finance loan results in more long term interest paid.
A 30-year home finance loan with a 15-year payoff
Numerous homeowners are refinancing with 15-year mortgages. Lower total interest costs are the main reason. 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 explains the possibilities using a $300,000 loan. A homeowner pays a total of $399,420 at the end of a 15-year term. The total cost of a 30-year mortgage is $547,223. However, the 30-year mortgage has a monthly payment $700 less. 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. The projected return is in no way guaranteed. However chances are the method would net more within the long term than simply refinancing with the shorter term.
Further reading
SmartMoney
smartmoney.com
New York Times
newyourktimes.com
Los Angeles Times
latimes.com
