Hello Magnolia Financial community!
You are probably aware of the current historically low mortgage rates. We have even seen some 30 year fixed conforming refinancing rates drop below 3%. Wow!
Two recurring questions we hear from our clients:
1.) “Should I refinance?”
Generally, the mortgage industry states that it is always advantageous to refinance if you can get a lower monthly payment. In this case, the word “always” is dangerous.
The better word is “probably.” Why? Because restarting a new 30 year or even 15 year mortgage may result in paying more in aggregate costs (i.e. interest and closing costs) over the life of your home ownership, then just finishing off your existing mortgage. To see if the savings are really there, you need to consider:
- How much longer will you live in your current home?
- How old is the existing mortgage (such that the principal portion exceeds the interest portion of the monthly payments now)?
- Are you itemizing deductions, including the mortgage interest?
- Are there house improvements you would like to roll into the new mortgage?
By discussing the items above and utilizing our mortgage comparison tool, we can help our clients make an informed decision with confidence based on their unique circumstances.
2.) Another question we hear relates to paying off an older mortgage:
“Is paying off the mortgage better than investing the money since the mortgage rate is fixed? And secondly, where am I going to find a guaranteed investment rate at or above my mortgage rate?
The logic in this statement is reasonable, but it is mathematically flawed. First, you need to remember that every monthly mortgage payment contains an interest component and a principle pay-down component. With each payment the interest portion shrinks and the principle portion increases (see the chart below). So, the aggregate interest you pay over the remaining life of the mortgage is NOT the interest rate times the existing principle. Therefore, the return on investment percentage you need to equal the interest cost saved with an earlier payoff is generally lower than the mortgage interest rate.
Of course, if the mortgage rate is unreasonably high relative to current rates, then it may be time to refinance instead of payoff. Confusing? That is why we are here. Please reach out to the MFG team…we are here to discuss your goals and help you make an informed decision.
If you have any questions regarding your mortgage, or any financial topic, we are happy to help.
All the best,
Armistead, Mark, Trent and the rest of your Magnolia Financial Group team
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All examples are hypothetical and are for illustrative purposes. Magnolia Financial Group and LPL Financial do not offer mortgage lending services.