You refinance to a lower rate, and you get a lower payment. But the opportunities don’t stop there.
Reduce your balance faster. With a lower interest rate, you pay more principal with each payment, especially in the first years of the loan. Example: After five years of payments on a 30-year loan of $200,000 at 4%, you would pay $19,706 in principal vs. $17,105 on the same loan at 5%. That’s an extra $2,601 in benefit on top of the $7,052 of interest savings. Total advantage = $9,653
Own Free and Clear Sooner. There are two ways to make this happen:
- Pay extra principal. Apply your monthly savings toward principal to shorten your loan term by several years. Example: Using the same loan terms from above, pay your $118/month savings as extra toward principal and cut the loan from 30 to 24.33 year
- Refinance for a shorter term. Rates on 15-year loans are typically lower than 30-year loans, so a payment on a shorter term may still be within a comfortable range for you.
Maximize Your Rate of Return Through Investments. If you deposit the $118 monthly savings from the example above into a tax deferred account earning 6% over time, it will grow to $81,852 in 25 years. If you use the savings to increase your 401K contribution with a 50% employer match, that figure would equal $122,782. Earning 6% on your money may be tough right now, yet historically, returns on a properly balanced and diversified portfolio are 7% or better. Always consult with a properly licensed financial advisor when making investment decisions.
Tap Into Your Equity. If you need to make repairs or improvements, you may be surprised at how much cash you might be able to free up without increasing your monthly payment. The same can be said for financing college educations or purchasing a second home or investment property.
Enjoy Peace of Mind. There’s comfort in making a prudent decision and putting a plan into action.
Before you get acclimated to a lower monthly payment, why not leverage your savings by making another wise decision? Below are a few options for putting your new-found extra cash to good use.
- Establish or enhance your emergency cash reserve.If your income is interrupted or if an opportunity or need arises, your emergency fund lets you avoid interest costs from borrowing or tax consequences from cashing out investments.
- Pay down non-tax deductible/high rate debt. Paying off high rate credit cards or other debts will free up your cash flow so you can invest it for growth.
- Invest, Invest, Invest. Max out your 401K contribution. Even a partial match from your employer yields an amazing, instant rate of return. Got kids? Start or ramp up a college savings plan. Tuition costs are rising faster than inflation. Invest now to help beat the trend.
- Make sure you are protected. Do you have sufficient life, disability and property insurance? Doing everything else right matters little if tragedy strikes and you lose it all due to lack of coverage. Why not set up a review with your insurance pro today? Call me if you need a referral to someone who can help.
- Pay off your loan faster.This is not always the best thing to do with your cash (see numbers 1, 2, 3 and 4), but for some, peace of mind has the best rate of return.
One more thing, too. How about buying your vacation/retirement home today in Cape Coral? Subsidize your payments by renting it out when you aren’t there. Then, when you do retire, you will have already built memories in your new home, and you will be well on your way to paying it off. Plus, when you sell your main residence later, the proceeds can fund living expenses. This is not for everyone, but at today’s low rates, it may make sense for some.
What is the value in refinancing my home?
Do you think the value of refinancing is gone?
Rates may be going up slightly but can still be an amazing bargain compared to consumer and installment rates. Total interest, total term and cash flow savings can be significant with the right plan.
Consolidating multiple debts into one home loan is not for everyone. For instance, using your equity to have the equivalent of a 30-year car loan is rarely a great idea. But it may work if you have the discipline to take advantage of a low rate to speed up—rather than slow down—payment terms.
Consolidation can make debts disappear with less total interest expense than they would otherwise.
Want to explore what a good consolidation plan could mean for you? Reach out, and we’ll be happy to help!
Your “payoff amount” is always higher than your remaining principal balance. Your balance is the amount of remaining principal owed. Your payoff amount is the balance plus prorated interest from the last payment received until the loan is actually paid off.
The funding date is usually different from the closing date. The government mandates a three-day rescission period for refinances of primary residences. Loan payoffs will not occur until the fourth business day post closing. This will affect the payoff amount, the final payment date and the release of any cash.
Do you actually get to skip a payment? It seems that way because your first regular payment is usually not due until the second month after closing. The reality is that while you do get a break on paying principal for the closing month, between the old and new loans, you are still paying a full month’s interest.
Don’t count on your existing escrow funds for closing. If you have an escrow account for taxes and/or insurance, these funds will be held there until the current loan is paid off. Accordingly, unless funds for taxes due and/or a new escrow account are covered by the new loan, be prepared to advance this money at closing. It will typically take several weeks before your current escrow account funds are returned to you, so it pays to plan ahead.
Do I need an appraisal to refinance my home?
Many factors go into calculating value during your home appraisal. Most importantly, recently sold comparable properties must be considered. “Comps” should be similar in location, size, style, room count, condition, utility, etc.
Appraisal is part art and part science, and the latter is hard to change. Sometimes, the hardest thing for owners is to be objective about their own homes. Always realize the appraiser is limited to the true comps available, and those comps will not always support the value you may expect.
To influence the “art” part of the equation, keep your home in good condition. Present your home for appraisal as you would for sale. Prepare written information regarding improvements, and offer an extra copy for your appraiser to keep. Be punctual, courteous and respectful, and your appraiser will do for you the best that can be done.
As always, we’re here to help you with your transaction and to answer your questions. We want you to be comfortable with the process and understand it fully.
We’re here to review your options and help you decide what might be right for you.
Read More: Refinance Process