Refinance Now!

I’m not one to pressure people into doing things — I certainly hate being pressured myself. But if you’re not looking into refinancing your home mortgage right now, you certainly should be.

You may never find a better deal in the mortgage market than right now. With long-term interest rates hovering around 3%, there’s a lot of potential to save money, build equity and speed your debt escape by refinancing your higher-interest loans and taking advantages of today’s historically low rates. Yes, applying for a new mortgage is a hassle, but it’s one that could save you tens of thousands of dollars.

We’ve been talking a lot lately about the best ways to get a home mortgage — things like bringing a 20% down payment, always using fixed-rate loans, keeping your payments low and borrowing on 15-year terms instead of 30-years. If you already own a home, there’s a chance that you didn’t follow some of these guidelines when you got your mortgage. But refinancing today gives you the opportunity to correct some of those errors and get into a mortgage that will be a great deal for you in the long term.

Why is this a good time to refinance? It’s all about interest rates. Due to the economic challenges of the past few years, interest rates are at  historic lows. You can borrow money to finance your home at around 3% today. Seven years ago, the prevailing interest rates were around 6.5%. In the early 1980s, they were around 18%. That gives you some perspective on the unbelievable deals available on mortgage today.

Why do interest rates matter so much? Because they have a tremendous affect on the amount of your monthly payments. If you have a $100,000 loan for 15 years at 6% interest, you’ll pay $6,000 in interest this year, and your monthly payments will be about $843. Over the course of the mortgage, you’ll pay a total of $151,740. But at a 3% interest rate, you’ll only pay $3,000 in interest this year, and your monthly payments will be $690. Over the life of the loan, you’ll pay a total of $124,200.  As you can see, a change in interest rate from 6% to 3% lowers monthly payments by more than $150, and lowers the total cost of the mortgage by around $27,000. That’s a huge difference.

Of course, you don’t need to have a 6% interest rate to benefit from refinancing — even if your current interest rate is around 4%, there can be some big advantages to getting into a new loan. Here are some of the top ways that refinancing now can make a big, positive impact on your long-term finances.

1) Lower monthly payments.

As we’ve already seen, getting into a cheaper mortgage can dramatically reduce the amount of your monthly mortgage payment. Reducing your payments is a great goal, because it frees up money in your monthly budget for other things like giving, investing or taking care of other family financial needs. The only caveat is to make sure that you plan to be in your current house for a while — if you refinance and then quickly move to another house, the short-term drop in your payments may not be enough to cover the closing costs of a new loan.

2) Switch from 30 years to 15 years.

The current interest rate environment creates a great opportunity to jump from a 30-year mortgage to a 15-year mortgage. Because rates on 15-year loans are lower (right at 3% as of this writing), you may be able get into a 15-year loan with a monthly payment that is similar to what you are paying now on your 30-year loan (especially if that loan has an interest rate higher than 5%). There are numerous advantages to 15-year loans, including quick equity building and huge savings over the lifetime of the loan. If you’re currently in a 30-year mortgage, I highly encourage you to consider refinancing into a 15-year loan today.

3) Build equity.

If you’re trying to build equity in your home, refinancing now could help with that. Shorter loans build equity much faster than long ones, so switching from 30 years to 15 years will make a dramatic difference in your ability to build home equity. But those aren’t the only two options — you can get 20-year, 10-year and 5-year loans all at really low interest rates. Even if you’re not able to go from 30 years to 15, dropping down to 20 years may represent a lot of savings and equity building for you. Similarly, if you’re in the final dozen years or so of a mortgage, this could be a great time to jump down to a 10-year or 5-year loan at shockingly low interest rates.

4) Pay your home off early.

Even if you don’t change the term of your mortgage, refinancing now can help you pay your home off earlier. If you refinance into a mortgage with a lower monthly payment, you can take the monthly savings and use it to pay ahead on the principle of the loan. Do that faithfully over time, and you’ll pay off your loan years ahead of schedule, and save thousands of dollars in interest by doing it.

I hope these reasons inspire you to look into refinancing your home mortgage soon. There’s almost no downside here, so take advantage of the opportunity that history is offering you today.


Photo by WoodleyWonderWorks. Used under Creative Commons License.

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