July 8, 2020 - Published by IAG Wealth Partners

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One positive side effect of extremely low interest rates is that mortgage rates have plummeted to near-record lows.

If you (or your children) have a mortgage and your income has not been significantly impacted by the COVID-19 economic downturn, today’s mortgage rates may present an opportunity to lower your interest costs, reduce your monthly payments, or pay off your mortgage more quickly.

How do you know whether refinance is profitable for you? In the end it all boils down to math, so here are three key questions to ask:

Is my current mortgage balance large enough to make it worthwhile?

The smaller your mortgage, the larger the interest rate reduction needs to be to make refinancing worthwhile.

For example, if you have 10 years and $50,000 left on your 3% mortgage you will pay roughly $7,900 in interest over the next 10 years. Refinancing to a new 10-year mortgage at 2.5% would reduce your interest cost to around $6,400 (save you $1,500 over 10 years).

However, once you factor in closing costs, you likely will save very little by refinancing your $50,000 mortgage to a lower rate.

Lower rates do impact larger mortgages. For example, if you have 15 years and $300,000 left on your 3.25% mortgage you will pay roughly $79,400 in interest over the next 15 years. Refinancing to a new 15-year mortgage at 2.75% would reduce your interest cost to around $66,500 (saving you $12,900 over 15 years).

Will I own this home long enough to make it worthwhile?

Paying upfront closing costs means refinancing will only be profitable to you after your long-term interest savings exceed your closing costs. Mathematically, the lower your closing costs the sooner your refinancing turns profitable for you.

Using the $300,000 mortgage example from above and assuming closing costs of $1,500, you would be 13 months into your new mortgage before your cumulative interest savings added up to your closing costs.

This calculation will be unique for every potential refinancing. While plans can change unexpectedly, if you plan on owning your home for longer than the breakeven point it may be worthwhile to refinance.

If refinancing is worthwhile, what mortgage length best fits my financial plan?

Refinancing gives you the opportunity to thoughtfully reprioritize your cash flow and you may have more flexibility than you realize.

While 15- and 30-year mortgage are most common, 10- and 20-year mortgage options are typically available. Some lenders will even let you customize your mortgage term to a specific length of your choosing. The term you choose depends on your priorities:

If your cash flow is too tight, if you want to increase retirement savings, or if you have other higher-cost debt, you could adjust your term to ensure lower monthly payments.

If your monthly payment is comfortable, you could reduce the term of your mortgage to pay it off sooner.

If you prefer to pay off your home faster, you could reduce the term of your mortgage and increase your monthly payments.

Your optimal mortgage strategy will be unique to your family’s financial circumstances, and we are happy to help you evaluate your options. Sometimes taking advantage of market opportunities requires looking at your debt instead of your assets.



Quote of the week: Dave Ramsey: “There are no shortcuts when it comes to getting out of debt.”

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

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