Refinance NOW and Payoff Your Home
If you are one of the lucky ones whose home value is not under water, it may be the time to refinance your mortgage. The old rule of thumb is, if you can save 1% or more on your rate, it makes sense to refinance. The reason; there are a number of expenses that will be owed when you refinance and the savings in your monthly payment must justify that expense.
Why now?
Rates have gone to an all-time low. Bankrate.com shows a 30 year fixed loan can carry a 3.875% rate, a 15 year, xxx%.
Remember, with the tax deduction, this low rate could have an after tax rate of less than 3.0%. That’s low!
Let’s say you do refinance to a lower rate. What should you do with the savings-keep making the same payment thus contributing the additional to paying off your home? Logically and purely mathematically, it does not make sense to pay off your home. As a matter of fact with rates as low as they are, you should carry most of your home’s value funded by the bank or mortgage company. We have professed this for years. But the tables have turned. We have done an about face and so have many homeowners.
It is interesting to see that depending on the rate of interest on your note, if you pay one additional payment on your home per year, you will cut seven years off of a 30 year fully amortized loan. Take a look at that savings. But that is not the reason I would say to pay odd your note. The true reason is that if you go into the autumn of your life with big debt (home mortgages are American’s biggest expense) you become extremely vulnerable to the issues we have seen lately. Think about losing your job near retirement. What if social security gets cut? How about if your company stopped paying your pension? Without a mortgage, many people would be better prepared to handle any of these events.
It interesting when I look at a cross section of the thousands of people I have met over the last two decades to discuss their finances. In every single case where that individual’s or couple’s mortgage was paid off, their financial situation was virtually risk free. They had almost nothing to worry about. This is not a statistically based argument, but more of an observance with a logical outcome. My guess, if there was an analysis done on those who had home debt going into retirement and those who did not, the facts would give a compelling reason for everyone to become unencumbered in prior to leaving their employer.
Many would say that paying off their home is an impossibility. But I urge you to check it out and do the math. I think you will be surprised how much easier it is than you think.
Good luck and happy investing.
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