Too Much Focus on Rate
Sure, the interest rate you pay on your home loan will dictate the payment. For example, if a 30-year fixed rate mortgage for $150,000 had a 4.5% interest rate, it would have a monthly payment of $760 per month*. The same loan at a 4.25% interest rate would have a monthly payment of $737 per month*. That $17 per month savings might seem really attractive at first, but there are some other considerations to make before you commit to a loan just because it’ll save you a few dollars a month. No, seriously—keep reading.
What About the Term?
The term of your mortgage loan is perhaps just as important—perhaps even more important—than the rate of your loan. First of all, by simply shortening the term of your mortgage, you’ll usually score a better interest rate on the loan anyway. Let’s take that $150,000 loan for example: for a 30-year fixed rate at 4.5% interest, you’d be looking at a $760 per month* loan payment. But what if you were to consider a 15-year fixed rate loan at 3.75% interest? This would bump your payment up to $1,090 per month*—or $330 more than the cost of the 30-year fixed rate loan.
While that number may seem a little daunting, take something important into consideration: The total interest paid on a 15-year fixed rate mortgage at a 3.75% interest rate is $46,350. The amount of interest paid on a 30-year fixed rate mortgage at 4.25%? $115,647*. Yes, you read that correctly: by simply paying a few hundred dollars more per month now, you’ll pay nearly $70,000 less in interest over the life of the loan at those example rates.
There are a lot of things you could do with $70,000. Wouldn’t it be nice to tuck that into a nest egg and use it for retirement instead of paying it to your lender? And did we mention that you’ll own your home in half the time in this example? You will, and by then you’ll have no mortgage payment at all. That 30-year loan only wishes it could say the same.
Debt Free: Courtesy of Your Mortgage
If you own a home and are considering refinancing, there is yet another thing to consider when choosing a loan: your debt situation. The average household in the U.S. has $15,000 in credit card debt at 15% interest. Those monthly payments can be a real drag and hinder your ability to flourish financially. So how, exactly, can your mortgage help to get you on the right path?
Equity to the Rescue
With each check you write to your mortgage company, you gain equity in your home. Your equity is the percentage of your home that you own, and that percentage increases slightly with each payment you make. After you’ve paid on your house for a few years, your equity will increase to the point where you’ll be able to utilize it strategically to solidify your financial future.
Let’s get back to your credit card debt. Let’s say you’re the average Joe: $15,000 in credit card debt. You’re tired of living paycheck to paycheck, and you just want to pay off those credit cards. Unfortunately, aside from coming into some money courtesy of your state lottery, your hands are tied, and you make monthly payments that aren’t really making a ding in your total debt. With interest rates that high, it’s no surprise: it’ll take you nearly 15 years to pay off that $15,000 at 15% interest if you make the minimum payments. It’s scary, but you have a better option: tapping into your equity.
Refinance your home strategically and cash out your equity, or some of your equity. Pay off those credit cards with it. While this won’t eliminate your debt, it will allow you to finance that debt at a much lower interest rate, essentially taking your 15% down to whatever your interest rate is on your refinanced mortgage loan. That in and of itself is a win.
But wait—there’s more. Seriously.
Now you’ve got one monthly payment to make: your new mortgage payment. No writing five checks a month to five different credit card companies. You’re down to one affordable monthly payment. Score!
Oh, and did we mention that once you strategize and possibly reduce your mortgage term along with obtaining cash from your equity, that you won’t lose any footing on the time you’ve spent paying on your mortgage? Think of it this way:
Getting Down to the Nitty Gritty
You have a 30-year mortgage. You’ve been paying on it for seven years. You have $15,000 in credit card debt. You refinance your mortgage and cash out some of your equity to pay off those credit cards.
You’ve now eliminated your credit card payments. You refinanced your loan for a 20-year term, effectively matching (or, in this case, decreasing) the number of years you originally had left on your loan. Your monthly payment on your mortgage goes up a bit, but you have eliminated all those extra payments, effectively saving you money each month (and possibly increasing your credit score to boot). Oh, and on top of that, you’re saving a ton in interest over the life of the loan by decreasing your loan term.
It’s All Coming Together Now…
You see that your mortgage is an investment that, when used strategically, can help you to secure financial freedom and that rate isn’t the most important thing to consider when you buy a home or refinance. Welcome to what home should feel like.
Now that you’re in-the-know, give NLC Loans™ a call. Our friendly Personal Mortgage Advisors are standing by and are ready to help you strategize and get the most out of your mortgage. Call us toll-free at 877-480-8050 for a free, no-strings-attached mortgage consultation. You’ve worked hard for your mortgage. Now it’s time for your mortgage to work hard for you.