Mortgage Basics 101 – Lesson 1 (Taking Advantage of low interest rates)

A small reduction in your interest rate can make a big difference.

Welcome to Mortgage Basics 101—an easy-to-understand, no nonsense series of mortgage tips designed to help you make the best financial decision for you and your family.

Class is now in session!

Today’s topic is procrastination. As you know, procrastination can cause serious problems in our everyday lives. But when it comes to financial decisions involving your mortgage, procrastination can cost you thousands of dollars.

Did you know that more than 45% of American homeowners with a mortgage have interest rates above 5% as of December 2012? (Source: CoreLogic). Why haven’t these folks taken advantage of record low interest rates? To be sure, some of these homeowners may have credit issues that prevent them from qualifying for a new loan, but the truth is that many of these homeowners are simply playing a waiting game that they can’t win—they’re trying to time the financial markets in hopes that interest rates will decline even more.

For many of these homeowners, now is the time to refinance. Let’s go to the chalkboard so you can see what we’re talking about. Let’s assume you have the following mortgage and that you’re trying to decide whether it makes sense to refinance*:

  Current Loan New Loan  
Interest Rate = 5.25 4.125 (4.194% APR; 30-Yr Term, 75% LTV )
Monthly Payment = $1,021 $843 (Excludes property taxes & insurance)
Initial Balance = $185,000 $173,801 (Current loan originated 04/2009)
Payment Savings = $178
Year One = $2,136
Year Five = $10,680

This homeowner can reduce their payment by over $175 each month and save thousands of dollars if they refinance now. Why would they wait? The answer is procrastination. Many homeowners choose to put off refinancing because they’re waiting for interest rates to go down or because they’re simply “too busy”. We see it happen every day.

Today’s lesson is clear: try and take advantage of today’s low interest rates. You don’t need to try and “time the market”. If interest rates go down (and we certainly hope they do), you can always look at refinancing again. On the other hand, if interest rates go up next year, as many financial experts are predicting, you may have missed a golden opportunity to save thousands of dollars.

*Keep in mind, these figures are estimates only, and will vary with the market conditions and closing costs in your area. Refinancing is subject to qualifying restrictions. Call (800) 217-7334 for more details. For questions regarding this article, please send an email to MortgageBasics101@jbnutter.com.


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