Low Mortgage Rates & Early Payoff Save You Hundreds Of Thousands

May 11th, 2010

Watching the stock markets drop over 5% this past week, did you check your 401(k) or other retirement accounts to see how much you lost? Has your retirement portfolio recovered completely from the 20% stock market drop between October 2007 and March of 2009? Uncertainty of the future and if you will have enough saved in your retirement account to supplement any social security you may receive and cover your health care costs and other living expenses when you retire is a common concern for most Americans. As a homeowner however you can take advantage of historically low interest rates to put yourself in a better financial position in retirement.

Using free mortgage calculators, calculate if a mortgage refinance today can have your home free and clear when you are ready to retire, and save hundreds of thousands of dollars in future payments you will not be making.

Early Payoff Calculator

Here is a not uncommon example:

If you purchased, or refinanced, your home in 2005 with a $325,000 30 year fixed rate mortgage at 6% your monthly mortgage payment is approximately $1950 per month and you currently owe approximately $300,000. If you wish to have your mortgage paid off in 20 years from from today fill in the early payoff calculator with your current balance, interest rate, original term of your mortgage and 20 years. Hit compute and you will see you need to pay an additional $200 per month to pay off your current mortgage in 20 years. This will save you approximately $69,000 over the life of the original mortgage. The savings calculation is the current monthly payments multiplied by the five years you will not be making payments less the extra monthly payment multiplied by the twenty years to pay off the loan: 1950/mo x 60 months = $117,000 of payments you will not make; less $200 per month x 240 months = $48,000 in extra payments; $117,000 – 48,000 = $69,000 in savings.

If you want to go through the same process and payoff your mortgage in 15 years you will need to pay an additional $555 per month. The total savings would be $134,100 over the next 25 years.

While these are significant savings they pale when compared to the savings with current mortgage rates, keep reading.

Savings From Refinance Mortgage

Using the early payoff calculator you are seeing how much money you save if you make additional payments to principal on your current mortgage. But with historically low mortgage rates, how much money would you save if are are able to lower your interest rate from 6% to 4.75% or 4.625% or even 4.25% with a new refinance mortgage?

With an amortization calculator and today’s mortgage rates let’s take a look at paying off your mortgage in 20 years and 15 years with a mortgage refinance.

Using 4.75% for a 30 year fixed rate mortgage and an existing mortgage balance of $300,000 your mortgage payment is approximately $1565 per month. Using the same example from above, assuming your current mortgage payment is $1950 per month you can save $385 per month. Or, you can continue to make the same payment you are making now and pay off your mortgage in 20 years with the new low interest rate. This will save you $117,000 in payments you will not make from 2030 to 2035 when the current mortgage is due.

Using 4.625% for a 20 year fixed rate mortgage and an existing mortgage balance of $300,000 your mortgage payment is approximately $1920 per month, a savings of only $30 per month over the current mortgage payment. However, you will save approximately $125,000 by 2035 from the lower payments and not having any mortgage payments for five years.

The amortization calculator shows a payment of $2255 per month for a 15 year fixed rate mortgage at 4.25% for a $300,000 mortgage. While this payment is a little over $300 more per month than your current mortgage payment, if you are able to make the higher payment you will be rewarded in the long term, saving over $230,000 by having ten years of no mortgage payments.

Too often the concentration on refinance mortgages is on monthly payment savings today. Looking to your future and retirement needs perhaps you can shift your focus to an early payoff for your mortgage and an easier retirement by leveraging your current mortgage payment with today’s historically low mortgage rates.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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