In this example we'll say you have a 6% , $200,000 loan, with monthly payments of $1,199 (this doesn't include taxes and insurance). Let's also say that interest rates are currently around 5% and since it usually doesn't make much sense to refinance with less than a 1% reduction in rate, you are now faced with the dilemma; would it make sense to refinance now or wait for that magical 4.5% interest rate that everyone and their cousin is talking about. When you think about all the government intervention and all the attention on the economy and the housing market, everyone seems to say that rates will eventually get there, so you make the decision to wait.
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Now let's have a look at how much money you would lose while you wait.
For the sake of argument, let's say that rates do come down to 4.5%, however it takes six months for it to happen (in my opinion, I would not bet that they will get that low). In this example, we're not going to include the tax benefits.
If you were to take that home mortgage and refinance that $200,000 right now, your monthly payment would go down to $1,074, giving you an additional $125 in cash flow every month. That $125 can go far towards reducing high interest debt, or you could just put it in savings. What that translates into is that six months down the road, you would have saved $750, agreed? (In fact it is more than that since when you have a lower interest rate, more money every month gets applied to the principal, so the money you save is actually $1,000. Your savings could be even more if you chose to invest the additional money instead, but hopefully you see the point).
Looking at it this way, it would take you over 15 months to make up that much money if you postponed refinancing into a 4.5% mortgage six months down the road. And then what if rates were to go UP during that time? How much more will that cost you in the long run?
What about those of you who are still renting? We will consider a hypothetical monthly rent payment of $1,000.
If you were to buy a home with a $200,000 mortgage at 5% right now, your monthly payment would increase to $1,074. But let's not forget about the equity building as well as the tax savings you'll get. Let's have a look. (For the sake of this example we are going to use a 25% tax bracket).
If you were to buy the home today, your net after tax payments would be reduced to $865, giving you a savings of $135 per month. So, after six months you would have reduced your principal by $1,457, plus received a net savings of $810, making a total savings of $2,267!! And remember, what if mortgage rates don't go down, or even continue to go up? Do you feel comfortable with those possible losses?
Deciding to get a home loan, whether you are in the market for a refinance or a new house purchase, is a significant financial decision. The purpose of this article is not to try to rush you into such a decision. The reason for this article is to help you see that any decision you make, which includes the decision to wait and not act now, can have a major impact on your financial situation, particularly when it is as large as a mortgage loan. If you decide to use your mortgage as a financial asset, it can be a fantastic investment for you in both the long run as well as the short term. You just want to be sure to work with a qualified mortgage lender who makes themselves available and is knowledgable enough to answer any of your questions, who will get you the correct loan product at a good price (it is not always going to be the absolute lowest, and that's alright), and who will have your best financial interests in mind for a long time to come.
When you think about the massive shift in the mortgage industry recently, there is a good chance many of the lower quality lenders have left the market, leaving more well seasoned, quality lenders. It is a good idea to ask around and get recommendations before making a final decision on who you are going to entrust with such a huge investment. Taking the time to locate the right lender will be much more valuable to you in the long run than searching and searching for an interest rate that is a measly 0.125% lower.
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