Starting early in 2020, mortgage rates began falling. I am writing this from the perspective of a person who refinanced in the summer of 2019 at 3.25% and at a time when I thought, “I can’t imagine the scenario when rates will be this low again in my lifetime.” We can now add mortgage rates to the list of head scratching events taking place in our country today. As I review and work through different scenarios, one mortgage seems to be coming up, especially for younger clients, as the appropriate refinance winner.
Here is a look at the breakdown on a fixed rate mortgage for $300,000 :
| Length | Current 30 Year | 20 Year | 15 Year |
| Rate | 3.88% | 2.50% | 2.50% |
| Payment | $1,410 | $1,589 | $2,000 |
| Difference | $179 | $590 | |
| Total Interest | $207,851 | $81,526 | $60,000 |
| Difference | $126,325 | $147,851 |
Most clients buying a home will opt for the 30 year loan because this gives them the most flexibility. You can also choose to pay more towards principal and turn your 30 year loan into a 20 year loan at your own discretion by making additional payments.
In our example, to keep it simple, let’s assume you just bought a home with a 30 year loan and now you read this awesome post and decide to refinance since rates are mind blowingly low.
As you can see, the 20 year loan refinance only increases your monthly payment by about $180, but saves you $126,000 in interest AND shortens the length of your loan!! Although the 15 year loan saves you an additional $21,526 in interest, you have to increase your monthly payment by almost $600, which is often not palatable or practical. A 20 year loan can provide a young family tremendous relief and opportunity in having their home paid for by the time their children are college-age.
However, the 20 year loan is not a “one size fits all” solution. Especially since there are also 10 year fixed rate mortgages, adjustable rate mortgages, home equity loans, and home equity lines of credit! Regardless of what “size” fits you best, the cost to borrow right now is very low and any pivot or move you can make that helps take advantage of these low rates is definitely worth exploring. If you’re not sure where to start, we’re here to help!
Happy Friday! Stay healthy and please be safe!