NEW YORK (
) -- You will probably never see such a golden opportunity to refinance your mortgage loan in your lifetime.
With mortgage loan rates at such a low point, refinancing now can save you hundreds of thousands of dollars in interest. And by refinancing for a shorter term, you might be able to become debt-free at a younger age than you previously expected, thus setting yourself up for a more secure retirement.
Of course, as you face the daily onslaught of sales pitches, media reports and financial advice, you're unlikely to hear too many voices pointing the way to escaping the debt trap completely, but the numbers speak for themselves.
Mortgage rates change daily, and everybody's financial picture is different. But chances are if you're at mid-career and own a home, you have a mortgage loan. There's also a good chance that your loan has a 30-year fixed-rate, because when you bought your home, your greatest concern was monthly cash flow.
And with home values in many areas declining so much over the past several years, you haven't considered refinancing.
Right now, the mortgage rates are so low that you might be able to refinance with a 15-year fixed-rate loan, thus escaping the debt trap faster than you might have originally planned, while also cutting your monthly loan payment. The icing on the cake is the outrageous amount of interest you will avoid paying.
This discussion does not cover "cash-out refinancing," which increases your debt and, as we have seen in this real estate crisis, could lead to disaster.
The radical notion presented here is to clean up your personal balance sheet while taking advantage of historically low rates.
Checking available rates on Tuesday,
Bank of America
was offering a "conventional" 15-year mortgage refinancing for $200,000 at a rate of 3.625%. Of course, this rate doesn't factor in any concerns the bank may have if you have had recent credit problems, and the bank charges 1.125 "points" at closing, or a fee of $2,250 to lock in that rate on a $200,000 refinancing. Factoring-in the points and loan amortization, the Annual Percentage Rate, or APR, is 3.936%.
The APR is very useful if you are comparing competing offers, based only on the rate and the points.
When we say "conventional," we mean that the loan is not guaranteed by the Federal Housing Administration, and therefore does not require the borrower to pay for insurance that protects the lender.
A conventional mortgage loan will have a maximum loan-to-value ratio (LTV) of 80%. This means that if your home is worth $300,000, you cannot borrow more than $240,000. If you do, you will either be paying a monthly mortgage insurance premium to the FHA or a monthly premium for private mortgage insurance. Either way, it's a total waste for the borrower, because
both forms of insurance only protect the lender
When we checked the rates on Tuesday, some banks were offering even lower rates for 15-year fixed refinancing. For
, the "featured rate" on Tuesday was 3.375%, with no points.
At Chase Online (Chase is held by
), the rate offered for a 15-year fixed refinance for $240,000 on a home worth $300,000 was 3.75%, with 1.125 points and an APR of 3.933%.
Take a look at a an example using Bank of America's 3.625% offering for a 15-year fixed refinancing. Obviously your scenario won't match this one, but it illustrates how much interest you could avoid paying if you refinance now.
You might need to make a painful decision, if your home has lost so much value that the bank will require you to bring cash to the table in order to lower the LTV to 80%. But it might be worth it.
Let's say that you purchased a home for $300,000 back in early 2006, borrowing $240,000 for 30 years at a fixed rate of 6.00%, and began making payments in March 2006. Using a 30-year payment schedule, your monthly payment of principal and interest is $1,400.58. You have made 67 monthly payments so far, including the September payment, paying a total of $74,097.19 in interest. Your remaining loan balance is $220,258.41. The remaining amount of interest you would pay over the remaining 293 payments would be $190,107.28.
If you refinance the remaining balance at Bank of America's offered rate of 3.625%, your monthly principal and interest payment would be $1,004.50, and the total amount of interest you would pay over the 15 years would be $99,861.80.
So not only would you be lowering your monthly outlay by $396.08, you would save a total of $90,245.48 in interest and get the mortgage monkey off your back 10 years earlier.
In order to achieve the refinancing while avoiding paying extra for mortgage insurance, you might need to make a serious sacrifice by ponying up extra cash if your home has declined in value, and, of course, you may have to pay points up-front. But with rates so low, this is the time to decide whether or not it's worth it. And if you are forced to bring cash to the table, at least you have freed-up a significant amount of monthly cash flow, allowing you to rebuild savings.
Your next challenge will be to resist the temptation to immediately "spend" the freed-up cash flow.
Discussing your refinancing options, in detail, with a mortgage lender can help you get a better handle on your entire financial picture, and these low rates point to a silver lining of the financial crisis. A sacrifice made now, can set you up for a much healthier situation down the line.
Yes, plans change and people move. But if you sell your home, you will have saved on interest in the meantime, and if you had to pay-down your loan balance while refinancing because your home had lost value, that will already have been done, making it much easier to sell the home.
Once again, the radical notion being discussed is becoming debt-free. That should be your goal. The assumption that you must always be in debt must be thrown away. These amazingly low refinancing rates could free-up enough cash flow for you to steadily save-up a nest egg, which can eventually provide retirement income.
Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.