The majority of homeowners remortgaging their homes are looking for one common benefit; a “low cost” mortgage. Gone are the days folks had to refinance due to a variable-rate-payment change or strong inflationary concerns. Everyone wants to save money, key is deciding when to make a smart move at the perfect time. If you’re having a tough time on whether or not to pull the trigger, use rate as the indicator. (Remember interest paid is function of total cost over time)
Why 4.375% is the benchmark rate to justify remortgaging
The 4.375% Fannie Mae /Freddie Mac coupon is at the highest level of 30 year fixed bond pricing in the current economic climate. Put another way, the 30 year fixed-rate mortgage is the most coveted mortgage type consumers opt for, indirectly driving the flow of money, which in turns affects “thresholds” in the different coupons (i.e. different rates).
When compared to a 15 year fixed loan, pricing (rate) is substantially lower although not as many people can qualify when stacked up against a shorter term amortization schedule, paying off the debt in half the time.
4.375% and higher represents a rate indicative of 2012 or earlier (house occupancy a factor here), meaning opportunity is match your current loan to a market rate.
How the numbers pencil using rate as justification to re-write your home loan.
Using a 30 Year Fixed Rate
Following scenario categorizes an original loan amount taken out in 2011 for $250,000 at 4.625% on a 30 year mortgage.
| Original Loan Amount | %%ITEMS%%#xA0; 250,000 | %%ITEMS%%#xA0; 241,000 |
| Current Value | %%ITEMS%%#xA0; 241,000 | %%ITEMS%%#xA0; 241,000 |
| Remaining Balance/Refinance Amount | %%ITEMS%%#xA0; 241,000 | %%ITEMS%%#xA0; 241,000 |
| Interest Rate | 4.63% | 3.75% |
| P & I Term (months) | 360 | 360 |
| Loan Amount | %%ITEMS%%#xA0; 250,000 | %%ITEMS%%#xA0; 241,000 |
| Payment (P&I) | $1,285 | $1,116 |
| Total Monthly Pmt | %%ITEMS%%#xA0; 1,285 | %%ITEMS%%#xA0; 1,116 |
| Net Savings | %%ITEMS%%#xA0; 169 | |
| TOTAL COST OVER 30 YEARS | ||
| Program Details | A | B |
| Principal Paid | %%ITEMS%%#xA0; 250,000 | %%ITEMS%%#xA0; 241,000 |
| Interest Paid | $212,726 | $160,799 |
| Total Cost (P&I) | %%ITEMS%%#xA0; 462,726 | %%ITEMS%%#xA0; 401,799 |
By remortgaging your current 30 year fixed at 4.625% into a new 30 year fixed with a lower loan amount (assuming principal pay down since date of original loan), you save $169 per month in rate and lower loan amount. Here’s the overall net tangible benefit-you’re saving $60.927 in interest or rather $169.24 in interest per month plus the $169 per month cash savings, providing a total refinance benefit of $338.48 per month, combo of payment and interest saving over time.
Mortgage Tip:One could always look at the fact that the actual payment change is $127 per month, while this is true, the interest savings cannot be ignored because the more interest that is paid, the longer it takes to pay off the loan. By reducing interest expense over time, you create home-equity (an asset) which could create future opportunities.
Using a 15 Year Fixed Rate
Following figures show a new 15 year mortgage to our same scenario.
| Original Loan Amount | %%ITEMS%%#xA0; 250,000 | %%ITEMS%%#xA0; 241,000 |
| Current Value | %%ITEMS%%#xA0; 241,000 | %%ITEMS%%#xA0; 241,000 |
| Remaining Balance/Refinance Amount | %%ITEMS%%#xA0; 241,000 | %%ITEMS%%#xA0; 241,000 |
| Interest Rate | 4.63% | 3.00% |
| P & I Term (months) | 360 | 180 |
| Loan Amount | %%ITEMS%%#xA0; 250,000 | %%ITEMS%%#xA0; 241,000 |
| Payment (P&I) | $1,285 | $1,664 |
| Total Monthly Pmt | %%ITEMS%%#xA0; 1,285 | %%ITEMS%%#xA0; 1,664 |
| Net Savings | %%ITEMS%%#xA0; (379) | |
| TOTAL COST OVER 30 YEARS | ||
| Program Details | A | B |
| Principal Paid | %%ITEMS%%#xA0; 250,000 | %%ITEMS%%#xA0; 241,000 |
| Interest Paid | $212,726 | $58,574 |
| Total Cost (P&I) | %%ITEMS%%#xA0; 462,726 | %%ITEMS%%#xA0; 299,574 |
The 15 year mortgage will inflate the payment, in this example $379 per month over the 360 months’ choice. However, in exchange for taking on a slightly higher payment, $163,152 in interest is saved and the loan is paid off in full in 180 months vs 360 months, resulting in a $906.40 monthly interest saving.
Many typically shy away from a 15 year mortgage due to the higher payment and the subsequent higher income needed to offset the liability, but because the spread is lower on a new 15 year stacked against a 30 year, it could be more viable choice for some who may have overlooked program in the past.
*Rates discussed 30 year 3.75/3.891 APR, 15 year 3.0/3.125 APR)
Trade in your 30 year or 15 year note
Do due to the nature of today’s interest rate environment brought on by weak economic data, trading in your high rate loan for a new loan with a lower rate and payment is a smart move. Better your financial position with today’s market opportunities rather than tomorrow’s unknown.
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