Home Mortgage Refinance and Retire Early !...
Many borrowers use a refinance to shorten the term of the mortgage. And brace yourself, even at low rates, a shorter term means a higher monthly payment. The benefit is that you'll build up equity faster and pay far less in total interest over the life of the loan.
Consider Jim Neill, 48, a real estate broker and his wife Merrilyn, 55, a psychotherapist. Recently, the couple took out a 15-year fixed rate loan at 6.75% to replace an 8.13% ARM with a 30-year term. Their monthly payment jumped by $200, but now they will own their own home outright by the time they retire. In addition, the total interest on the 15-year loan will come to $95,447, vs. $222,234 on the remaining life of the ARM -- and that assumes their adjustable rate would have held steady at its current 8.13%. "This is forced savings," says Jim. "When we retire, we can scale down and take equity out of the house."
If you can't afford the payments on a 15-year mortgage, your next best means of building equity is to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan's term to match the years that are left on your old loan -- if you are five years into a 30-year mortgage, for example, ask for a 25-year loan.
A few year ago, Mr. Alan Greenspan decided that it was time to lower interest rates - everyone's interest rates. He was fortunate to be in a position to do exactly that as chairman of the Federal Reserve. What happened? Things went nuts - well, in a calm economist sort of way. People started looking at interest rates and saying, hey, we can afford to buy a house for that! Other people started opening businesses with the low-interest-rate capital they'd gotten their hands on, and the economy took off like crazy.
But like in every story, there were some who thought they'd lost - the people who'd taken out their home loans before anyone knew who Alan Greenspan was, to be precise. This was terrible for them; if they'd left buying a home two years later, their interest rates could have been two to three percentage points lower - which could save them thousands and thousands of dollars, not to mention enabling them to pay off their houses quicker.
What on earth could they do?
Enter the Mortgage Refinancier.
It makes sense: if you've been paying your mortgage faithfully for five years, and that bank over there has the money to lend you AND they can make a profit by lending it to you several interest points lower, you're a great risk. They already know you pay your bills, and they're happy to make money while letting you pay your bills more cheaply. When independent banks and mortgage brokers started refinancing mortgages, it gave the banks that held the higher interest rate mortgages a shock; they depend on the interest from mortgages to make profits for their shareholders. Without mortgages, they don't have a business.
And so they started refinancing their own mortgages.
Refinancing Your Mortgage
To refinance, you don't need much: a mortgage, a steady payment record, and an interest rate at least a point or so higher than the market rate. When you refinance, be certain to get a fixed interest rate, even if it's a point or so higher; a fixed rate won't zoom up on you if Mr. Greenspan suddenly decides that he's been kind to people with loans for long enough. Take a good look at your loan; if you've been paying it steadily at your current payment level and your refinanced mortgage allows you to pay less each month with a final payment at the same time as your original plan, you'll probably save a lot more money if you make payments at your original payment level and pay the loan off earlier. Plus the more quickly you pay off the principal in your loan, the more equity you build up in your home, and that can be leveraged into all kinds of things.
If you can refinance your mortgage, you should. Interest rates are higher than when Greenspan started twiddling with them, but they're still relatively low. And it's been predicted four or five times now that the refinance boom is over, that interest rates are going up - they're still down. Get 'em while you can!
