SLADE COLUMN: Use low interest rates to drive down debt
During the second week of May, Charleston County saved $10.5 million in interest payments by refinancing long-term debt. Homeowners with mortgages who have not yet refinanced should similarly take note of the opportunity that today’s low interest rates offer.
In fact, anyone with interest-bearing debt should see if they can get a better deal, whether it’s a loan on a home, a car, a boat, or even credit-card debt.
Interest rates are bouncing around all-time lows, and those incredibly low rates can save you serious money. Lower rates also mean that more of your payments go toward actually reducing your debt. Of course, any loan refinancing will require a respectable credit score, and refinancing a mortgage requires you to have enough equity built up in the property.
Here’s the good news:
Mortgage interest rates are at or near record lows, about 3.4 percent for a 30-year fixed-rate loan and 2.6 percent for a 15-year loan. Just a half-dozen years ago, rates were twice that high.
Real estate values are rising. Maybe you didn’t have enough home equity to refinance two years ago, but you might today.
Real estate websites like Zillow and Trulia can give you an idea of what your home is worth. Subtract what you owe from the estimated value of your home, and that’s your home equity. If you don’t have enough equity to refinance, run the numbers and see if it would make sense to use other funds you may have to pay down your mortgage and refinance the balance.
Running the numbers
To see the potential benefit, let’s say you took out a mortgage in 2005, borrowing $120,000 at 5.9 percent. You’ve been paying $712 a month on that mortgage.
Now, eight years later, you would owe $105,000 on that loan, still paying $712 a month. Let’s assume you qualify to refinance, and you’ll wrap $3,000 in refinancing costs such as an appraisal and title insurance into your new loan.
Borrowing $108,000 for 30 years at 3.4 percent would result in monthly payments of just $479, which is $223 less than you’re paying now. You would be extending your loan term, adding 30 years to the 8 you’ve paid, but if your primary goal is low monthly expenses, maybe that’s a trade-off worth considering.
Alternatively, you could borrow that $108,000 for 15 years at record low rates of 2.56 percent for a payment of $723 a month. That’s $11 more than you’re paying now, but you just shaved seven years off your loan term and will build equity more quickly.
Want to split the difference? A 20-year loan would mean a faster payoff and lower monthly payments. You can do these calculations yourself on a mortgage finance calculator. There are plenty online.
Mortgage refinancing can be time-consuming, and there are expenses. Car and boat loans are a different story, and in some cases the banks will pay you to refinance.
For example, South Carolina Federal Credit Union has been offering a $100 incentive and rates as low at 2.5 percent to people who transfer an auto or boat loan worth $10,000 or more. Interestingly, some institutions offer lower rates for transferred loans than for new ones, so even a very recent loan could be ripe for refinancing.
Does it make a big difference on a car or boat loan? The payment on a $15,000, five-year loan would be $276 at 4 percent, and $266 at 2.5 percent. Not much difference, but still $600 over the life of the loan.
Credit-card debt can be more challenging to refinance, but considering how high credit-card interest rates are, it’s worth considering.
You can refinance credit-card debt by transferring it to a different credit card, such as a card with a zero-interest introductory rate. The benefits can be great, but it requires discipline and attention to detail.
Typically, issuers will charge you 3 percent of your balance to transfer it to the new card — or maybe another card you already have — and your challenge is to then pay off the debt during that zero-interest period without ever being late or missing a payment. And you don’t want to use that card with the transferred balance for other purchases, creating more debt.
Typically, the fine print will say that if you miss a payment or are late, your interest rate will soar, which would leave you worse off than when you started.
So, be careful, but here’s the potential benefit:
Let’s say you’ve run up a $3,000 balance on a credit card with an 18.9 percent interest rate, and you can afford to pay $200 a month. You’ll have that balance paid off in 18 months, but you’ll pay $450 in interest over that time.
If you could transfer that balance to a no-annual-fee card offering zero interest for 15 months, with a 3 percent balance transfer fee, you would pay a $90 fee and no interest. By paying the same $200 each month, you would pay off the debt in 15 months and save $390 in interest charges.
If you have good credit, you could get a deal like that. If you have excellent credit, you may even find an offer that includes a sign-up incentive like cash or airline miles possibly worth more than the transfer fee.
Reach David Slade at 937-5552 or Twitter @DSladeNews.