Explore Our
“Off The Wall” Blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
The High Costs of a Low-Rate Mortgage
Factoring in unexpected costs of a low-rate mortgage.
Mortgage rates are low…very low! In fact, 30-year fixed mortgage rates have been below or near 4 percent for several months. Often, it makes great financial sense to refinance your home at the lower rates. After all, who wouldn’t want to save a few bucks?
However, before you make the call to “1-800 GET-ME-A-GREAT-RATE,” you need to consider all the costs and fees that go into refinancing your home. The closing costs can get pretty steep, as there are many fees associated with getting that great new 30-year rate, such as: origination charges (sometimes referred to as “points”), an appraisal fee, title insurance, recording charges, transfer taxes, etc. On a $417,000 mortgage, these fees can total about $5,500. Despite these expenses, refinancing to a lower rate may still be the smart move.
The next step is to consider how long you intend to stay in your house and then calculate the “payback.” In other words, how long does it take to pay back the closing costs when you consider the monthly savings with new lower mortgage payment verses the original mortgage payment? For example, the closing costs on a $417,000 30-year, fixed-rate mortgage at 3.875 percent is $5,500, with a new monthly payment of $1,961. The old mortgage payment was $2,238, which means the homeowner will save $277 per month. The closing costs of $5,500 divided by the monthly savings of $277 equates to a payback period of nearly 20 months. So, if you are going to be in the house longer than that, it’s a good deal. However, if a potential move is in your future, you may want to stay with your current mortgage.
Let’s consider the facts about home ownership and how long people typically remain in their homes. This is, in fact, one of the questions the U.S. Census Bureau asked in its 2007 American Community Survey. Only 74 percent of average single-family homeowners are still in their home after five years. This means that one out of four families had moved! The move-out rate is even higher for multi-family condo owners. One out of two families had moved out after five years!
Next, let’s take a look at the 30-year amortization table that is often provided in your mortgage closing documents. This is the one that you quickly glanced over as you were signing your legal name 39 times (don’t forget your middle initial). Okay, you went with the 30-year, fixed-rate mortgage, you got a great rate of 3.875 percent, and you paid the closing costs. Since you intend to be in the house for a long time, it’s a smart move.
Now, fast forward five years, and it’s time to move (hey, you got a promotion; good things can happen!). The big question is: How much principal have you worked off over the last five years? You’ve been paying the mortgage company $1,961 per month, which equates to more than $117,000 over five long years. During this five-year period, only $40,542 has gone to principal, and a whopping $77,058 has gone to interest! Yes, the mortgage company has applied about 65 percent of your payments to interest! Lenders lend money to make a profit on the interest, and mortgages can be very profitable—especially in the first half of the term, when most of the interest is being paid. Also, they know that most families will not stay in their homes for the full term.
If you are one of those families that wants to pay down the mortgage principal faster while also building more equity, consider a bi-weekly mortgage payment. Simply stated, take your monthly mortgage payment and divide it in half. Then pay your mortgage company that payment every two weeks. You make 26 payments per year, which is the equivalent of 13 monthly payments rather than 12. The extra payment should be taken directly off the principal, which will reduce your payment schedule accordingly, and you will pay off your mortgage in about 21 years! Many mortgage companies offer a bi-weekly payment option, and it’s even possible to convert your current monthly payments into a bi-weekly schedule.
Read the article on U.S. News & World Report here! >
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.