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Personally, with a rate of 4.75%, I think that looking over the long run, it's unwise to keep paying the same amount thereby paying down principal faster. Every additional dollar which goes towards principal is essentially the same as investing that money and getting the interest rate of your mortgage. However, because of the mortgage deduction, the actual rate of interest you're getting is only around 4% (depending of course on your tax bracket; could be higher or lower). That's a good rate of return compared to other short term investment vehicles, obviously, but over the long run you're better putting that money in something that over the long term has greater returns.
In addition, there's a good chance that should you need to borrow money in the future that you're not going to be able to get an interest rate near that effective 4% rate. If you put the money in an investment and need it later (for whatever reason), it's yours. If you put the money into your mortgage and need it later, you need to take out another loan, and you're at the mercy of lenders.
UPDATE: But let me just add that I agree with Charlton Dude wholeheartedly that the extra money should be, if possible, saved and not spent. Prepaying the mortgage has the decided advantage of being a very disciplined act, with a consistent rate of return, and there are benefits psychologically to not being able to just take it back out.
I agree 100% on this. I should have included the investment part, but I was just making the point that you can't blow the extra money. I am actually struggling right now trying to decide if I should pay the extra on the mortgage or invest it. I am figuring that it won't be too long before interest rates skyrocket and I can lock in savings rates MUCH higher than what my mortgage interest rate is. Then I would actually be making money off my mortgage.
4% @ 30 years! WOW IMO if that happens things will be much worse than they currently are. Here is one scenario for that type of interest rate.
Unemployment will be over 10% nationally.
The Big 3 minus 1 would have failed.
The $700B to the Banks/Auto companies would be gone.
Some major national home builders would have failed.
.....and Bush would still be President.
But please don't lose sight that the last one above IS NOT going to happen!
the 'NEW' President and Democratic Congress has a 'Deal'. Its called a $800B to $1T dollar stimulus package that will be passed early February 2009. This will pump money into all corners of the US for Domestic programs. That money will ripple through the economy like Champagne at a New Years eve party. This will IMO make the economy turn by 4Q 2009 and create a bounce in growth. Even if its just 1 years worth it will be enough to make money tight for lending and drive up Interest Rates.
So if we see 4% 30 year interest rates we will all be in world of hurts economically!
What should you typically expect to pay on closing costs for a refi? I called my mortage broker who we used in August when we bought our house at 6.25%. I was expecting to hear 1500-2000k, but he threw out a ballpark of 3400! Now I believe we would get this done with no points or origination fees and would be able to recoup the closing costs in about 19 months which seems to line up with everyone else on here. We only had a quick call today so he didn't break down the costs. They just seemed quite high.
As someone whom, again, follows the markets 24/7 this is just a friendly reminder:
Since the very dawn of man kind, realtors, bankers, mortgage loan officers and so on have always stated "RIGHT NOW" is the best time to buy. You need to put on those ear plugs and do your own research on the matter and make an educated decision.
In my personal opinion, interest rates will drop and likely drop significantly from the already current lows. So NOW, may not the very best time to buy or refinance your home. However, it is not a BAD time either. My prediction? And you can laught if you like, is that we will see a 30 year morgage rate very near 4% on the coming weeks, or month.
My personal, but totally unprofessional opinion is that after the first of the year, we will see some sort of offering that will be available to all homeowners in good standing such as a no-cost refi to a standard rate in the 4% range. I think this will give the economy the boost it needs. The downside will be the effects when the offer expires and is no longer available- will have the counter effect for future home purchases?
I looked at it a bit differently. Will the interest rates drop down to 4%? How the heck would I know? I can't know that. So what I determined is at what rate does it make financial sense for me, with my home and my current mortgage and my current rate to refi. It makes sense at 4.875% (It made sense at 5% too). Timing the market is difficult, if not impossible. Some people will likely be right in their projections. Others, not so much. Either way it's an unknown. So the best any of us can do it to determine the point where it makes good sense for us to purchase (or, in my case, refi) based on our needs.
If the rate drops lower then great! I have a float-down option. If it doesn't drop then fine. If it drops low but not for folks doing a refi then fine. The point is that no one KNOWS for certain what will happen to rates and exactly where the rate will be. I can only make my decision on what I know today and what my needs are given what I know for sure.
While lower rates will help those of us who have a decent amount of equity in their home (or are looking to buy), it will do jack squat for those homeowners in CA and FL who are underwater or even those with less than 20% equity in their home. The major problem in the worst parts of the housing mess is that people simply owe more than their home is worth. The only way to fix that would be to modify the principal owed to the bank or raise the market value of the house (obviously option #1 is easier than #2).
Lower rates are not the magic bullet to fix the economy. IMHO, the government should be either be focusing on modifying the original loans to these people (which causes complete moral hazard) or let the market in these areas correct itself.
I highly recommend that people purchase a home when they can put 20% down (or at least avoid PMI). Having good equity in one's home (and good equity to me = 20+%) gives one pretty solid footing and will work nicely in situations like doing a refi. And at least 6 months reserves just in case...
Not sure why that statement was even made since President Bush had nothing to do with this. By now, we should all know that we, the American citizens, caused this mess for the entire world.
But anyway, I do not see the rates going much lower at all. Why should they? We have less than a month until P.E. Obama takes office. He has already made it abundantly clear that the solution to this "economic crisis" is to pour billions (now planned to be into the trillions) into every corporation that is crying about possible bankruptcy. The banks are going to get even more bailout money so they have no reason to lower the rates any further. Not that I blame him. P.E. Obama does understand that the American citizens caused this problem and the American citizens needs to pay to fix this problem. Sucks for people like myself who actually live within my means but I guess we all have to pay for others mistakes since we are all in it together.
I just checked my lender's website and the rate shot WAY UP to 6.25% today. What the heck??? Glad I got 4.75%. I wonder if the rate today was a typo?
Last edited by Charlton Dude; 12-22-2008 at 03:31 PM..
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this is just a friendly reminder:
Rates Skyrocket
