Last Wednesday the Federal Reserve cut rates for the third time this year. If your mortgage rate is 4.00% or higher, it is a great time to discuss a potential refinance with a banker or mortgage lender. Many factors weigh into that decision such as how long you are going to be in the home. The lower rates may provide an opportunity to move from a longer-term note, such as 30-year, to a shorter-term note like a 15-year. Often times, the shorter term loans also have lower rates, but let’s assume the exact same rate of 3.75% with the following example of a couple borrowing $300,000.
- A 30-year mortgage will carry a principal and interest payment of $1,389.35 per month, but the total payback to the bank (360 payments) is $500,164 with a total of $200,164 of interest paid. The 1st payment has $451.85 going to principal and $937.50 going to interest. It isn’t until month 139 that your principal portion ($695.01) of your payment is larger than your interest portion ($694.34).
- A 15-year mortgage will carry a principal and interest payment of $2,181.67 per month, but the total pay back to the bank (180 payments) is $392,700 with a total of $92,700 of interest paid. The 1st payment has $1,244.17 going to principal and $937.50 going to interest.
The $107,464 of interest savings is highly desirable, but the additional $792.32 per month of required payment is the obvious deterrent. Certainly, this payment must be within your budget, but if it is, refinancing to a shorter term note could be a financial slam dunk! Oh by the way, you have the house paid off FIFTEEN years sooner too!
As always, we hope you find the Weekly Market Review both interesting and informative.
Have a great week!
Trevor N. Coe, CFP