Personal Finance: It's time to refinance if you haven't already

Personal Finance: It's time to refinance if you haven't already

March 28th, 2012 Chris Hopkins in Business Diary

If you are a homeowner with a mortgage and you have not refinanced within the past couple of years, now may be the time.

Responding to recent signs of improvement in the economic environment, interest rates have been inching higher off of their historic lows. The rates on 30-year home mortgages crept above 4 percent last week after having plumbed the depths of modern memory, leading to speculation that the long decline in rates may be ending.

Perhaps, although the same prediction was proffered when the 30-year mortgage dropped to 5 percent. Nevertheless, by any objective standard, rates are so low today that any small additional relief would be immaterial. So if you have been waiting to find the bottom, or even if you refinanced within the past couple of years at a rate above 5 percent, it may pay you to lock in now.

Home financing rates this low would have been inconceivable to an earlier generation. In 1982, David Letterman debuted on NBC, gas cost 91 cents per gallon, and the rate on a 30-year single family home mortgage was 15.1 percent.

This means a homeowner who borrowed $100,000 then and made his last payment this month would have disgorged a whopping $358,000 in interest along the way. Of course, no one actually did, since most borrowers refinanced as rates receded or sold the home along the way, but the exercise is instructive when contrasted with the present environment.

Now consider the same $100,000 mortgage at today's much more favorable rate of 4.03 percent. The monthly principal and interest payment on a new 30-year loan would be $479 (compared with $1,272 in the previous example).

Lock it in and pay it down over 30 years, and your total interest expenditure comes in at $72,493. With rates at this level, there is practically no downside to locking in now. Even if the rate falls another half point, the monthly payment on the loan only drops by $29.

If a refi makes sense in your situation, consider the next logical step: shorten up the term of the loan. Mortgage rates are lower for shorter durations, so not only do you pay down the note faster, you accrue less interest per dollar financed. Current average rates for 15-year fixed mortgages are 3.25 percent. Payments on your $100,000 loan would run $703, and you will have spent only $26,500 in interest by the time you burn the mortgage.

Of course these are simplified examples, and other factors could apply. You may have to pay discount points up front (or fold them into the mortgage) to get the best rate.

Your credit score also will influence the rate you ultimately receive, so it is wise to check your credit reports from the three major agencies before applying. Be sure to shop around and get full disclosure of all fees and conditions.

If you plan to remain in your home for at least 5 more years and have a mortgage rate above 5 percent, it is definitely worth running the numbers.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfree press.com.