Mortgage refinancing: several ways to benefit from low rates

a sign promoting mortgage refinancing

Low mortgage rates make refinancing a popular choice, but long-term savings and investment opportunities should be considered before making a decision. Image: CC TheTruthAbout/Flickr

Mortgage refinancing is booming. Its hard to get a mortgage loan, but mortgage refinancing currently makes up more than 80 percent of mortgage lending. Record low mortgage rates have existing homeowners considering refinancing to lower their monthly payments or shorten the term of the mortgage loan. Mortgage refinancing includes factors such as interest rates and taxes that determine whether or not its a good idea. Plus, deciding whether or not to refinance with a 15-or 30-year mortgage has major long-term financial implications.

Refinancing keeps mortgage lending alive

By refinancing a mortgage, a homeowner can save thousands of dollars in mortgage payments each year. SmartMoney reports that homeowners are refinancing mortgages in record numbers. 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. The average rate for a 30-year fixed mortgage was 4.51 percent for the week ended Sept. 10. The average rate for a 15-year mortgage was 4.02 percent. A year ago, those rates averaged 5.54 percent and 4.97 percent, respectively.

When mortgage refinancing makes sense

Saving money with lower monthly payments is attractive, but not every homeowner should refinance a mortgage. The New York Times reports that it all boils down to whether or not you can really save money over the duration of the loan. Homeowners need to determine their closing costs and monthly savings. Divide closing costs by savings; that shows how many months it takes to break even. If a homeowners stays put that long, a refinance could work. Taxes could also make the amount of savings deceptive. 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

Refinancing with a 15-year loan substantially reduces interest costs. However, Kathy M. Kristof at the Los Angeles Times writes that a shorter-term loan means a higher monthly payment. Even for homeowners who can afford a higher monthly payment, there may be smarter ways for them to invest their cash. Kristof uses a $300,000 loan as an example. A 15-year mortgage has a total cost of $399,420. A 30-year mortgage: $547,223. However, the 30-year mortgage has a monthly payment $700 less. 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 money could pay off the $198,701 left on the mortgage with $80,000 left over. 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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