If you’re like most Americans, your family home is your largest asset, competing with your IRA or 401(k) as the base for your financial security. And your home, unlike an investment account, provides shelter as well as appreciation over the long run. Now it’s time to re-evaluate your home from a financial point of view.
One of the brightest spots in the economy is home building and home prices. The quarantine sent some people searching for more attractive surroundings, perhaps farther from the city center, where they may never commute again. Even those who aren’t planning to move are focused on remodeling.
With mortgage rates at historic low levels, every homeowner and potential homebuyer should be considering locking in mortgage debt at current rates.
Time to refi?
Mortgage refinancing has been booming since spring, when rates collapsed. But it’s estimated that another 18 million homeowners could save money by refinancing their loans. If your credit is good and you’re paying more than 3.5% on your current mortgage, it pays to investigate a no-cost refi.
The Federal Reserve promised to keep interest rates low. But mortgage rates have already started to creep higher than they were last month. Factors such as hints of inflation or a successful vaccine trial contribute to economic growth. And growth leads to more demand for money and rising interest rates on 10-year Treasury notes, which are the basis for mortgage rates.
Also, last week, Fannie Mae and Freddie Mac — the government-sponsored enterprises that guarantee, package and resell most mortgages — said they would charge lenders an extra 0.50% risk premium when they buy the loans. It’s a cost that will be passed on to borrowers, pushing rates higher.
15- or 30-year loan?
Historically, my advice has been to take the shortest-term home loan you can afford. That could give you a fully paid home by the time you retire — maybe even by the time your children are in college and you need the cash flow. Even if you’re older and your time horizon is less than 30 years, a bank will still make a long-term, low-rate loan.
Locking in low rates for longer gives you extra cash flow in uncertain times. If inflation and higher rates do return, your extra cash (“chicken money”) will earn more in bank CDs. And you’ll have locked-in a low monthly mortgage payment.
Cost of 15- vs. 30-year monthly costs at current rates:
–30-year fixed rate loan: The current average rate nationally is 3.37%, up almost a quarter of a percentage point in the past week. At that rate, for every $100,000 you’ll borrow, you will pay $441.82 per month in principal and interest — $13.17 more than the week before.
–15-year fixed rate loan: The average rate for a 15-year fixed refi is 2.81 percent, also slightly higher than the previous week. The monthly principal and interest payment on every $100,000 borrowed would be about $675. However, you’ll save a fortune in interest over the life of the loan, and build your home equity more quickly.
A reverse mortgage
This is also a good time for seniors to consider a reverse mortgage — a monthly, guaranteed, tax-free withdrawal from your home equity. As noted in previous columns, you can never be forced out of your home or “run out” of equity. When you do move out or pass on, the loan must be repaid out of the sale of the home, or your heirs can pay off the balance and keep the home. And you or your heirs can never owe more than the home is worth.
But there are fees and interest attached to reverse mortgages, which is why you need independent advice before taking one out. Still, right rates are low and home prices remain high — a good basis for your reverse mortgage withdrawal calculation.
Bottom line: Even if you are bored with your home after months of quarantine or partial lock-down, it’s time to view it with a new appreciation. Do more than redecorating. Reconsider an appropriate refinancing while you can.
(Article written by Terry Savage)