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.

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