Home loan financial institutions aren’t financing home sales, however they are refinancing mortgages to the tune of 80 percent of their business. Record low home loan rates have existing homeowners considering refinancing to lower their monthly payments or shorten the term of the mortgage. Whether they succeed accomplishing that with refinancing a mortgage depends on such factors as rates of interest and taxes. Homeowners must also know about the long-term effects resulting from the decision between refinancing with a 15-year or 30-year mortgage.
with few house sales, refinancing supports lenders
By refinancing a mortgage, a homeowner can conserve thousands of dollars in home finance loan payments each year. An article in SmartMoney on the phenomenon said that 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. MBA records on refinancing activity from 1990 to 2008 average nearly half that percentage of mortgage lending. A 30-year mortgage averaged a fixed rate of 4.51 percent on Sept. 10. A 15-year fixed mortgage averaged 4.02 percent on the very same date. During the same period last year average rates for 30-year fixed and 15-year fixed mortgages were 5.54 and 4.97 percent.
Making an informed refinancing decision
Saving money with lower monthly payments is attractive, but not each homeowner should refinance a mortgage. 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 have to be nailed down are closing costs and monthly savings. Factoring the monthly payment savings into the total closing costs shows how long it takes to start coming out ahead. Homeowners have to look ahead. Refinancing makes sense if they plan to stay within the house longer than it takes to break even on the closing costs. Occasionally taxes can fool uninformed refinancers. An essential detail that can’t be overlooked is that the interest paid on a mortgage is tax-deductible. Closing costs typically save nothing over time, when interest payments do. At the same time, upping money flow by refinancing with a 30-year mortgage results in more long term interest paid.
An incident for an extended term, with a twist
The clear benefit of 15-year refinancing is lower total interest costs. However, Kathy M. Kristof at the Los Angeles Times writes that a shorter-term loan means a higher monthly payment. Even for homeowners who can afford a higher monthly payment, there may be smarter ways for them to invest their money. To illustrate, Kristof describes a situation with a $300,000 mortgage. 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. With the mortgage 15-years on, if the homeowner put that $700 a month into a balanced mix of stocks that has demonstrated an average return over 83 years of 9.6 percent, the net would be $270,305. Halfway to the 30-year loan, the proceeds could retire the $198,701 balance. That would leave $80,000 to play with. Of course, investing within the stock market would be risky, but in this case, it would bring a greater reward than ! refinancing a 15-year mortgage.
SmartMoney
smartmoney.com
New York Times
newyourktimes.com
Los Angeles Times
latimes.com
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