By: Richard Feldman
By: Richard Feldman, CFP, AIF, MBA
There has never been a better time to obtain a mortgage or refinance a property due to mortgage rates at all time lows. The problem is obtaining a mortgage or refinancing a home is very difficult these days for all but the most pristine of borrowers due to restrictive underwriting by the banks in addition to difficult appraisals due to distressed housing sales around the country. If you are able to qualify the benefit is that average mortgage rates on fifteen and thirty year terms are at historic lows this past week. The average rate on a 30 year fixed mortgage was 3.91% and a 15 year was 3.21%.
Individuals and families should not only be looking at the payment that they make each month but the amount of interest that they pay the bank every year as well. Individuals may be well served in going from a thirty year conventional mortgage that they took out a few years ago to a fifteen year mortgage at today’s low rates.
Let’s assume in the following example that an individual has a 6% fixed rate loan for thirty years on a principal amount of $240,000 that was taken out a few years ago. Principal and Interest on this loan would come out to be $1,438.92 per month. Total payments on this loan are as follows:
Loan Amount: $240,000
Payment Amount Monthly: $1,438.92 Principle & Interest
Interest Rate: 6.0%
Interest Compounding: Monthly
Total Amount Financed: $518,012.58
Total Finance Charge: $278,012.58
Now let’s assume that an individual was able to refinance into a fifteen year loan at 3.25%. The total interest savings by refinancing the loan would be $214,460. Your monthly mortgage payment would increase by $247.49 per month because you are going from a 30 year term to a 15 year term but your ultimate savings in terms of interest cost that you would pay the bank would be $214,460. In addition more of your payment would go to principle rather than interest and help build equity in your home faster and pay off your loan sooner.
Principle Amount: $240,000
Payment Amount Monthly: $1,686.41 PI
Interest Rate : 3.25%
Interest Compounding: Monthly
Total Payments: $303,552
Total Finance Charge: $63,552
Obtaining a mortgage in today’s mortgage market requires a FICO credit score that is typically in the 750 range.
FICO is a credit score developed by Fair Isaac Corporation. A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person, which is the perceived likelihood that the person will pay debts in a timely manner. A credit score is primarily based on credit report information, typically sourced from credit bureaus / credit reference agencies.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.
Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques.
Refinancing a mortgage at historically low mortgage rates can lead to a substantial increase in net worth over time in addition to dramatically reducing the amount of interest that you pay your lender. Individuals and families would be well served by looking at some non-traditional ways of qualifying for a mortgage. This could mean tapping a retirement account or taking out a 401K loan in order to put more equity into your house in order to qualify for refinancing your current mortgage. Even if your payment goes up per month the ultimate payoff in the end by reducing your financing costs will provide a dramatic benefit to your long term financial health and goals.