With interest rates plunging all over the world, including right here in the U.S., many fixed-income investors are scratching their heads about where they can find something that pays more than 1% without taking on a pile of risk.
The answer is right under their noses. Plus, the return is way better than you can get on stocks and bonds (even gold!). Not only that, but the return is guaranteed.
What is this magic investment?
It’s called your mortgage.
Over the past several years, millions of homeowners have refinanced their mortgages at super low rates, so many people think they can’t do any better. Not true.
With the yield on the benchmark 10-year Treasury note falling below 1.40%, a record low, mortgage rates are moving down along with it.
A new report from Deutsche Bank estimates that about two-thirds of homeowners with a mortgage can now benefit from refinancing into a 3.5% or lower mortgage, which is where long-term rates are now – and may be going lower still.
The fact is, people who have already refinanced can do so again and save even more money, or reduce the term on their existing mortgage, in the process paying down their loan a lot faster and getting closer to the day when they can burn their mortgage and own their home free and clear.
Let’s say you currently have a $300,000 30-year home loan with a 4.5% interest rate. Not too shabby. However, it does look a bit ragged compared to today’s rates, which have dropped to near 3% in the wake of the Brexit vote.
The principal and interest payment on your current loan is $1,520. If you refinanced into a 3.5% loan, your P&I payment would be $1,347, a savings of $173 a month.
With your current loan, you’d pay almost $250,000 in interest over the life of the loan. By refinancing into a 3.5% mortgage, you’d pay about $185,000 in interest. Over 30 years, the savings would be $65,000. Assuming closing costs of about $6,000, you’d make more than 10 times your original investment plus your return would be guaranteed, unless you sold the house in the meantime or refinanced again. Not even Bernie Madoff could offer that kind of return.
You might also think about refinancing into a shorter-term loan, enabling you to pay off your mortgage a lot faster than you are now. That could be a big issue if you’re staring retirement in the face and don’t want to still be saddled with a mortgage payment every month after your regular paychecks stop.
Rates on 15-year mortgages are currently at 3% or less. Refinancing into a 15-year loan at 3%, your monthly P&I payment would be $2,071, or about $551 more than you’re paying now. But if you could swing that, you’d pay only $73,000 in interest over the life of the loan, or $177,000 less than you would pay if you stuck with your current loan. Now you would make more than 30 fold on your investment in the refi and over just 15 years. On top of that, you wouldn’t have to worry about coming up with $1,520 every month on a reduced retirement income.
There are also a lot of people who still haven’t taken advantage of the Home Affordable Refinance Program, better known as HARP. But you better hurry – the program expires at the end of the year. Although the program has been extended a few times already, there hasn’t been much talk about extending it yet one more time. Then again, if the presumptive Democratic candidate for president should stumble on her way to the election, there’s no telling what goodies her cronies in the Administration will come up with to persuade voters to see the light.
HARP has to be one of the biggest financial no-brainers of all time, yet a lot of people, I’ve read, seem to think it’s a scam. Maybe because it sounds too good to be true, but in this case it really is true. I should know, since I did a HARP refi a few years ago and smile every time I open my mortgage statement. The rate on our mortgage was cut nearly in half, plus we went from a 30-year to a 20-year mortgage with the exact same monthly payment.
If you’re not familiar with it, the government rolled out HARP back in March 2009 to help homeowners refinance their mortgages at current rates, even if they’re “underwater,” or owe more than their home is worth. It was the least the government could do after giving billions of dollars of bailout funds to commercial banks, who largely started the mortgage mess, hand in hand with the federal government. But I digress.
The eligibility rules are pretty simple, and also pretty easy to meet. You don’t need a property appraisal. Usually, there’s no minimum credit score, and there’s no limit on how underwater your mortgage is. Click here to find out more, or call your friendly neighborhood mortgage lender.
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
