It has been nearly 16 months since I urged readers to take advantage of low interest rates and refinancing long-term loans to lower monthly expenses, pay off debt more quickly or both.
Pat yourself on the back if you refinanced a mortgage in early 2013, because that was the end of a brief and unusual time when fixed-rate, 30-year loans could be obtained with interest rates lower than 3.5 percent. Mortgage rates had never been lower, and having a low-interest-rate loan can do wonders for keeping monthly payments down.
The good news is, although mortgage loan rates did increase later that year, they have actually been drifting down since December, and now they are not far above those best-in-generations low rates that I wrote about last year. The average 30-year loan rate in July was 4.13 percent according to Freddie Mac, the federally chartered mortgage financier.
Some homeowners, who may not have had enough home equity to refinance before, now may have another opportunity if they live in an area where real estate values have been rising fast - Mount Pleasant and downtown Charleston, for example.
And for those planning to buy a home, low rates have lasted longer than many expected. It's easy to predict that rates will rise as the Federal Reserve becomes less aggressive about holding them down, but hard to say how soon or how fast.
Looking back more than 40 years, 30-year mortgages with average rates below 5 percent simply didn't exist until 2009. The average rate on 15-year mortgages fell below 4 percent in 2010, for the first time, and stood at 3.24 percent in July.
The important thing is to consider just how large the financial impact can be, every month, for someone who locks in a low-rate loan for a home they might live in for many years. A mortgage payment is often a family's single-largest expense, but it's also one of the few over which people have some control, and is certain not to rise (with a fixed-rate loan).
Borrow $200,000 at 4.25 percent for 30 years and you'll pay $984 every month. With a 5.25 percent interest rate, the monthly payment rises to $1,104. That's an extra $1,440 every year, and you don't get more for your money, you get less.
With the higher interest rate, you would pay more each month yet own less of the house during the early years of the loan, because of the way 30-year mortgages work.
After 5 years, a family with a $200,000 loan at 4.25 percent would have paid off $18,385 of the balance. With a 5.25 percent loan, they would have paid off only $15,701, despite having made larger loan payments every month.
Low mortgage rates build home equity faster, even as you pay less out of pocket. Most people don't stay in a home long enough to pay off a mortgage, so building equity quickly is important, because equity is essentially the money you get to keep after selling the house and paying off the loan.
Refinancing a mortgage can change not only the monthly payment, but how quickly you build up equity. There are lots of good mortgage calculators online that let people run different scenarios.
Those considering refinancing a mortgage need to consider one more factor, though, and that's the fees and expenses a bank or credit union will charge. The difference between one lender and another can be quite substantial, possibly thousands of dollars, so shop around.
Those who are considering buying a home also need to consider bank charges, and they also should make sure they know about state initiatives and programs that can make homeownership more affordable, such as the mortgage credit certificate - good for an annual tax credit worth up to $2,000. There are also state incentives involving low-interest loans and downpayment assistance, such as the Palmetto Heroes program for teachers, police, firefighters and others. Check out schousing.com for information.
Contact David Slade at 937-5552.
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