How You're Refinancing Wrong
NEW YORK (TheStreet) -- Thousands upon thousands of homeowners are trimming their mortgage payments by refinancing to today's rock-bottom rates, but about a third of them are still missing out on the best possible deal.
That's the finding of a survey by LendingTree that found that too many borrowers replace their old loans with ones that add years of payments.
"Only one-third of homeowners who have refinanced their existing mortgage in the last three years realized the benefits of a shorter-term home loan," LendingTree said of its survey results.
In other words, a borrower five years into a 30-year mortgage takes out a new 30-year loan, adding five years of payments. Because the new loan typically carries a lower interest rate, the borrower's monthly payment goes down. But some of that saving is offset by the extra years of payments.About 69% of homeowners who refinanced last year took out 30-year loans, meaning they took on years of extra payments. To save the most, the new loan should have a term ending at the same time as the old one, or earlier. Taking out a 25-year loan instead of a 30-year loan does mean shouldering a slightly higher monthly payment. But the extra amount is principal, which pays down the debt. Because the debt on the loan with the shorter term gets smaller faster, the interest charges on the remaining balance get smaller faster. The snowballing effect can produce considerable savings in interest charges. Imagine a homeowner who took out a 30-year loan for $300,000 at the average rate of 6.25%. Today, that borrower could get a new 30-year loan on the remaining $280,012 debt for only about 3.5%, cutting the payment to $1,257 from $1,847. The alternative: take out a 25-year loan at 3.5%. The new payment would be slightly higher -- $1,402 -- but total interest costs over 25 years would be $140,530 instead of $172,644. Why don't more borrowers grab this extra saving? After all, even though the payment on a 25-year loan is higher than on the 30-year deal, it's still far less than the borrower paid on the old loan, so it should be affordable. Some borrowers probably figure they won't keep the loan long enough to enjoy all these savings. Others undoubtedly focus on getting the lowest monthly payment they can. LendingTree found that the typical borrower who refinanced reduced the interest payment by two percentage points, producing substantial savings. So for many the saving from refinancing is so big they don't see the need to reach for a bit more that will take years to materialize. Still, it's worth running the numbers to see what you can save with a shorter loan term. Aside from reducing the number of years of payments, the shorter term often gets the borrower a lower rate as well. Fifteen-year loans, for instance, now average just under 3%, a half-point less than the 30-year deal.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV