Interest rates on mortgages have fallen to historic lows. Check out the chart below, it details the history of 30 year fixed rate mortgages from the early 70’s to present:
Why should you care?
Let’s use an example to illustrate. You purchased a home four years ago, taking on a $200,000, 30 year mortgage with a 6.25% interest rate in the process. Before property taxes and homeowners insurance, your payment is about $1,230. If you take 30 years to repay that mortgage, never refinancing, you will have paid a whopping $243,000 in cumulative interest!
It’s 2011 and you’re four years into your mortgage; it’s been paid down to $190,000. Available to you in today’s market, if you meet the lenders’ underwriting requirements, are 30 year mortgage rates of 4.25%. You qualify and decide to refinance.
Your monthly payment is now $934 because your interest rate has been reduced by 2%. But you have also extended the term of your mortgage. (You only had 26 years left before you refinanced; now you have 30 again.) Enter Marilyn (math-wizard) Dimitroff’s favorite strategy when it comes to mortgage refinancing: Continue making your old payment ($1230 in this case) after you refinance.
If you were to do that in this scenario, you would reduce your interest costs by over $109,000 while shortening the term of your original mortgage by over seven years. No gimmicks or sketchy internet promises from a “Nigerian prince” involved with this strategy, just the use of mathematics to your advantage.
Recent and necessary improvements to the mortgage underwriting process make applying for a mortgage difficult and time consuming for borrowers (read fogging a mirror is no longer sufficient evidence of your ability to pay). The improved process isn’t fun and there’s a lot of paperwork involved. But the example above is typical and it would be wasteful to ignore an opportunity to reduce a cost (interest) that brings us absolutely no enjoyment.
I don’t feel so bad if an occasional dinner out runs $100. But that’s because I enjoy the experience, the opportunity for conversation and I have an undeniable love for food. Oddly, I don’t feel the same way about interest payments. There’s no experience to speak off and certainly no enjoyment. Bottom line: Don’t drag your feet. If your mortgage rate starts with a 5 or higher (4.875% even) and you plan on staying in your home for a while, START SHOPPING!
