If, in the past few years of record-low interest rates, you refinanced your mortgage, bravo! If you're one of the many who sat on the sidelines telling yourself, "I really should refinance," but never getting around to it, then read on. It's quite possibly not too late for you (especially since mortgage rates dropped this week for the first time in two months).
Refinancing is when you take out a new mortgage on your home, at a lower interest rate, decreasing the amount of your monthly payments. In some creative refinancings, you can actually increase the amount of the loan for such Foolish pursuits as paying down credit card debt or making long-term investments in stocks.
Mortgage interest is tax-deductible, so to calculate the effective yield of a mortgage, multiply the interest rate by your tax bracket. Then, subtract that from your interest rate. Investors in a 33% bracket with a 7.5% mortgage interest rate, for example, are effectively paying a 5% mortgage interest rate (7.5 x 0.33 = 2.5; 7.5 - 2.5 = 5.0).
Your first step is to assess the myriad mortgage costs involved -- such as the origination fee, discount points, the appraisal, the credit report, processing, title insurance, and the escrow fee.
Next, check out available loans and interest rates. Consider what "points," if any, you might have to pay. A point is equal to 1% of the value of your loan. It's paid upfront when you close the loan.
If you find a rate that is lower than your current rate by one or even half a percentage point, that can result in whopping interest savings over 15 to 30 years, depending on how much you borrow.
For example, $100,000 borrowed at 7% instead of 8% for 30 years will save about $25,000 over the length of the loan. If you invest the extra $69 a month in the Standard & Poor's 500, at the S&P's historical 10% annual return, in 30 years you would have roughly $180,000. You owe it to yourself to crunch some numbers and see if refinancing makes sense right now.
You'll find more information and guidance in our Home Center and in this article on refinancing.
And if thinking about money matters makes your head hurt and you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service, featuring customized independent advice from a variety of objective financial experts. To take savings matters into your own hands, visit our Short-term Savings Center.
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