Over the past 5 years, mortgage interest rates have gone in one direction, down, down, and down. Each time we appear to have hit a floor, the bottom drops out of it to another floor.
Over this time frame, some borrowers have taken an “I’ll get around to it” attitude. However, I thought it wise to break down what the actual savings on refinancing in today’s market will actually mean.
Example 1 – Paying off your Mortgage Faster
Borrower John in Chesterfield, MO has a $175,000 mortgage at 5.5%with 25 years left at a payment of $993.63 and has been putting off refinancing due to the trouble of rounding up all of the income documentation.
What is available is $175,000 mortgage at 15 years at 2.75% which carries a payment of $1,187.59.
Total payback on John’s loan (993.63x25x12) is $298,089 but by applying for a lower rate on a 15 year leaves him with a total payback of $213,766, saving John a whopping $84,322.
Ex. 2 Improving Cash Flow for Investments
Borrower Lisa from Overland Park, Kansas has a $200,000 Mortgage at 5.5% with 25 years left which carries payment of $1,135.58
What Lisa wants to do with her situation is refinance to a 30 at 3.500% and invest the excess cash flow. The payment on her $200,000 mortgage is $898.08, saving her $237.49. If Lisa invests the $237 savings every month over 30 years, assuming a 5% return in a tax deferred account, she will have $197,000 left over when she pays off her mortgage in 30 years.
So to conclude, if it’s to pay off your mortgage quicker, or to take advantage of investment opportunities, there are great financial opportunities in today’s refinance market.