Home loan are a special occasion these days as mortgage financial institutions depend on refinancing—currently 80 percent of the market—to survive. 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. A series of factors converge to influence a decision. Things like rates of interest and taxes will determine if refinancing can make a good difference. Plus, deciding whether or not to refinance with a 15-or 30-year mortgage has major long-term financial implications.
Refinancing aids home loan financial institutions stay busy
It’s possible to save thousands of dollars in a year with lower monthly payments by refinancing a house loan. SmartMoney reports that homeowners are refinancing mortgages in record numbers. According to the Mortgage Bankers Association, refinancing accounted for 80.5 percent of total mortgage lending. That rate virtually doubles the amount of activity the MBA recorded in the previous 18 years. Low mortgage rates are fueling the trend. A 15-year fixed mortgage averaged 4.02 percent on the exact same date. Last September the fixed rates were much higher. A 30-year term came in at 5.54 percent and 4.97 percent for 15-years.
Choosing to refinance a home loan
Saving cash with lower monthly payments is attractive, however not each homeowner should refinance a home loan. Refinancing only makes sense 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 within the house long enough for refinancing to pay off. Taxes could also make the amount of savings deceptive. An important detail that can’t be overlooked is the interest paid on a home loan is tax-deductible. Closing costs usually conserve nothing over time, while interest payments do. Plus, refinancing with a 30-year mortgage may improve monthly cash flow, however increase long-term interest costs substantially.
A case for an extended term, with a twist
Refinancing with a 15-year loan substantially reduces interest costs. But the higher payments can give refinancers second thoughts, states Kathy M. Kristof of the Los Angeles Times. Even for homeowners who can afford a higher monthly payment, there may be smarter ways for them to invest their cash. Kristof uses a $300,000 loan as an example. A homeowner pays a total of $399,420 at the end of a 15-year term. Over 30 years that loan will cost $547,223. However the 30-year home loan can offer an advantage. The monthly payment is $700 lower. All that monthly savings, pumped into a diverse collection of stocks—with a documented average return going back 83 years of 9.6 percent, would yield $279,305 within 15 years. That’s enough cash to settle the entire mortgage–$198,701—and have an $80,000 profit. This method involves a certain degree of risk, however it offers at the really least a chance to come out much further ahead than refinancing a 15-year home financ! e loan and standing pat.
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SmartMoney
smartmoney.com
New York Times
newyourktimes.com
Los Angeles Times
latimes.com
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