Photo of a Home Loan sign.
Thanks to refinancing, home loan companies are still alive. CC by TheTruthAbout.../Flickr

Mortgage loans are rare these days. However, mortgage refinancing accounts for 80 percent of mortgage activity at the present time. Homeowners looking at such low interest rates want to refinance in hopes of either improving cash flow with lower payments or saving money over time with shorter or longer terms. Whether they succeed accomplishing that with mortgage refinancing depends on such factors as interest rates and taxes. Homeowners must also be aware of the long-term effects resulting from the decision between refinancing with a 15-year or 30-year mortgage.

With few home sales, refinancing supports lenders

Homeowners can save thousands by refinancing a mortgage. In the course of a year, lower monthly payments can add up to thousands of dollars in savings. As reported by SmartMoney, more homeowners than ever are attempting to refinance their mortgages. According to the Mortgage Bankers Association, refinancing accounted for 80.5 percent of total mortgage lending. The MBA said that is nearly twice the rate of refinancing than what was documented from 1990 to 2008. 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 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.

Deciding to refinance a mortgage

At first glance the savings realized from lower payments appears to be a no-brainer. However, refinancing a mortgage doesn’t always work as advertised. Refinancing only makes sense if a net gain in savings is realized when the mortgage is paid off. Key numbers in the equation that need 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. To make refinancing worthwhile, homeowners need to remain living in the house long enough for refinancing to pay off. Taxes will always complicate a situation as well. Most mortgage interest is tax deductible — a lot of closing costs aren’t. Plus, refinancing with a 30-year mortgage may improve monthly cash flow but increase long-term interest costs substantially.

A creative refinancing alternative

Many homeowners are refinancing with 15-year mortgages. Lower total interest costs are the main reason. However, Kathy M. Kristof at the Los Angeles Times writes that a shorter-term loan means a higher monthly payment. Some homeowners aren’t that affected by paying more each month. Even so, it’s possible they could reap substantial returns by investing that cash instead. Kristof explains the possibilities using a $300,000 loan. She starts with a 15-year term. The total cost at the end is $399.420. The total cost of a 30-year mortgage is $547,223. But the 30-year mortgage can offer an advantage. The monthly payment is $700 lower. If that money were invested in a diversified portfolio of stocks that has averaged a 9.6 percent return over the last 83 years, it would be worth $279,305 after 15 years. That’s enough money to pay off the entire mortgage — $198,701 — and have an $80,000 profit. Of course, investing in the stock market would be risky, but in this case, it would bring a greater reward than refinancing a 15-year mortgage.



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