You refinance to a lower rate, and you get a lower payment. But the opportunities don’t stop there.
Reduce your balance faster. When you refinance to a lower interest rate, you pay more principal with each payment, especially in the first years of the loan. Example: After five years of payments on a 30-year loan of $200,000 at 4%, you would pay $19,706 in principal vs. $17,105 on the same loan at 5%. That’s an extra $2,601 in benefit on top of the $7,052 of interest savings. Total advantage = $9,653
Own Free and Clear Sooner. There are two ways to make this happen:
• Pay extra principal. Apply your monthly savings from the refinance toward principal to shorten your loan term by several years. Example: Using the same loan terms from above, pay your $118/month savings as extra toward principal and cut the loan from 30 to 24.33 years.
• Get rid of PMI. If the market has gone up or you have paid down some equity you may be able to get more monthly savings because you can get rid of PMI. The recent FHA loans have PMI for the life of the loan so refinancing to a conventional loan while rate are down and the market is a good idea.
• Refinance for a shorter term. Rates on 15-year loans and 20-year loans are typically lower than 30-year loans, so a payment on a shorter term may still be within a comfortable range for you. (The rate on a 15-year is typically better than on a 20-year)
• Refinance for a shorter term. Rates on 15-year loans and 20-year loans are typically lower than 30-year loans, so a payment on a shorter term may still be within a comfortable range for you. (The rate on a 15-year is typically better than on a 20-year)
• Refinance for a shorter term. Rates on 15-year loans and 20-year loans are typically lower than 30-year loans, so a payment on a shorter term may still be within a comfortable range for you. (The rate on a 15-year is typically better than on a 20-year)
Maximize Your Rate of Return Through Investments.
If you deposit the $118 monthly savings from the example above into a tax-deferred account earning 6% over time, it will grow to $81,852 in 25 years. If you use the savings to increase your 401K contribution with a 50% employer match, that figure would equal $122,782. Earning 6% on your money may be tough right now, yet historically, returns on a properly balanced and diversified portfolio are 7% or better. Always consult with a properly licensed financial advisor and or a CFP when making investment decisions.
Tap Into Your Equity. If you need to make repairs or improvements, you may be surprised at how much cash you might be able to free up without increasing your monthly payment. The same can be said for financing college educations or purchasing a second home or investment property.
Enjoy Peace of Mind. There’s comfort in having lower minimum payments when “life” happens. Your savings will last longer with your lower payments in case someone gets laid off or if there is a Strike. (Side note: You can not close on a purchase loan or refi while on strike)
I’m here to review your options and help you decide what might be right for you.
Feel Free to reach out to me on my cell phone anytime.
810-516-4227
Photo by Josh Appel on Unsplash
