Personal Finance: Catch the refinance train before it pulls away from the station

Personal Finance: Catch the refinance train before it pulls away from the station

July 11th, 2018 by Christopher A. Hopkins in Business Diary

For most families, a home mortgage represents both their largest single expenditure and their biggest monthly obligation. According to credit bureau Experian, the national average mortgage loan balance in 2017 was $201,000. Tennesseans carried an average of $150,000, while in Georgia the mean loan balance was $170,000. Obligations of this magnitude carried into retirement are likely to seriously impact your standard of living once the paycheck stops, particularly in the era of the self-directed 401(k) and the waning of traditional pension plans.

Christopher A. Hopkins

Christopher A. Hopkins

Photo by Contributed Photo /Times Free Press.

Therefore, it makes sense to revisit your mortgage terms and take any steps you can to retire or reduce your loan balance and minimize your cumulative interest payments. And while the lowest mortgage rates in our lifetimes are now behind us, recent declines have provided one last opportunity to lock in a lower rate and stuff a few more dollar bills into the retirement pot.

The most obvious and impactful move is to refinance into a shorter term. Moving from a 30-year to a 15-year loan term will save you a wad of cash over time that you can spend later on. Halving the repayment period saves many thousands in interest and helps you arrive in debt-free nirvana much sooner.

Consider a typical 30 year, $150,000 mortgage loan at the national average fixed rate of 4.5 percent. Monthly principal and interest payments will run $760, which means you will shell out a total of $124,000 in interest costs alone to the bank over the life of the loan. Now, consider a 15 year loan at the current national average rate of 4 percent. Monthly P&I rises by just $350, but you will save a total of $75,000 in finance charges and be able to burn the mortgage in half the time. Think of the impact of an extra 75k in the bank for your golden years.

Of course some homeowners are simply unable to absorb the higher monthly obligation of a 15-year loan. Nevertheless, there are still a few tricks you can apply that will have a material impact. Most traditional mortgages allow early prepayment (you should verify this with your lender). Adding just one hundred bucks a month to the regular payment in our example will knock $30,000 off the total interest cost for the home and retire the mortgage six years early.

If that is still a budgetary stretch, consider splitting your mortgage payments in half and making them bi-weekly instead of monthly. This approach requires discipline, but is easily automated through your bank's online bill pay facility. Splitting the monthly amount into half payments every two weeks results in the equivalent of one additional monthly payment per year with almost negligible impact on your cash flow, and reduces the average balance on which interest accrues. For our hypothetical 30-year mortgage, this simple plan knocks four years off the payoff and shaves about $22,000 from your finance cost.

These suggestions assume that you have already pursued higher priority debt reduction options. For example, it would make no sense to speed up the retirement of a 5 percent mortgage if you are carrying balances on high-interest credit cards, student loans or other costly debt. First things first.

Free mortgage calculators abound on the internet that allow you to play with alternative strategies. Bankrate.com offers a number of tools to help you estimate your potential savings under various scenarios. Then get started. Almost everyone can apply at least one of these techniques to reduce their lifetime housing costs and plump up their retirement assets.

Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.