Thewriting on thewall
I’m on the Fed watch this fall. Once again the Federal Open Market Committee (FOMC) led by Federal Reserve Board chair Janet Yellen is signaling an increase in interest rates before the end of the year. At its September meeting, many of the members reinforced the message that the federal funds rate will go up this year. In fact, three members wanted an immediate rate hike. As a whole, the committee pinned its projected rate increase on the inflation rate reaching 2 percent (it was at 1.7 percent when they met) and a strengthening labor market. The day after they met, jobless claims had dropped to a 2-month low.
If you are thinking of refinancing your home or buying a home, the cost of waiting could be significant. Home prices continue to rise. Interest rates are projected to increase. If you buy a home, you can growyour net worth, pay your own mortgage instead of your landlord’s, and reward yourself with a home that you own. And the cost of waiting? Here’s a hypothetical example: If you bought a home for $250,000 today with a 30-year fixed-rate loan at 3.875 percent (annual percentage pate 3.89 percent) and 20 percent down, your monthly principal and interest payment would be $1,178.
If you wait a year and the same house is now $270,000 and your 30-year fixedrate loan has increased to 4.5 percent (APR 4.52 percent) and with the same 20 percent down payment, your monthly principal and interest is $1,368. That’s $190 more each month and $68,400 over the life of the 30-year loan.
I’ve been saying this for a while, but it bears repeating as the prospect of higher rates looms: 15 is the new 30. If you have a 30-year fixed-rate mortgage, refinance now, cut the term to 15 years, and potentially save your net worth tens of thousands of dollars. Or take a 15-year fixed-rate loan when you buy. Yes, you’ll pay more per month for a 15-year loan than a 30-year loan, but over the life of the loan the savings are dramatic.
See the accompanying chart for the example of a loan amount $300,000 with a 20 percent down payment. The savings to net worth by choosing the 15-year fixed-rate loan: $128,416 in principal and interest paid.
Remember, there may be tax advantages to owning, too, but you’ll need to consult your tax advisor.
Here are my three takeaways: (1) The Fed shows strong signs of raising rates before the end of the year; (2) waiting to refinance or purchase could cost you thousands of dollars over the life of a loan; and (3) moving to a shorter term may save you tens of thousands of dollars. If you’ve been sitting on the fence, don’t wait any longer.
Francis Phillips is senior mortgage loan originator with First Choice Loan Services Inc. in Santa Fe. He has served as director of business development for national mortgage companies. He and his mortgage partners have funded and built three homes for Santa Fe Habitat for Humanity. Contact him at francis.phillips@fcloans. com or 505.982.3400.