Making the correct decision based upon the numbers

Doug Horn

Managing investments and making financial decisions is hard enough without someone intentionally trying to confuse the issues. Here is one decision that should be made. For those of you who have a home mortgage with an interest rate 5 ½ percent or higher, it is time to refinance. I have been surprised lately of those who still have a 6 or 6 ½ percent or higher mortgage rate and have not refinanced.

There are a couple of reasons why refinancing may not make sense. One would be if the home’s current value is below the loan value. Unless a substantial payment is made to reduce the loan to below the home’s current appraised value, refinancing would not be possible. Also, if a move from the home is expected within the next two years or less, then incurring the refinance costs would not be practical. For everyone else, it would appear refinancing is a smart decision.

Taking a look at the numbers, this is what might be saved if the rates are lowered to 4 ½ percent. For a $100,000 mortgage with 25 years remaining and an interest rate of 6 ½ percent, the monthly mortgage payment would be $675.21. By rolling all of the costs into the new mortgage, the new monthly payment would be $569.73 keeping the same loan duration or $519.35 by going back to a 30 year mortgage. The monthly savings would be $105.48 or $155.86 respectively. This savings may vary based upon the actual closing costs incurred. For mortgages with twice the value, the savings would also be approximately twice the amount shown.

While it may not seem worth the time and effort to drop the mortgage rate from 6 ½ to 4 ½ percent, the above results demonstrate the contrary.

I am often asked if it is better to refinance at 15 years rather than 30 years due to the large amount saved in interest cost. With rates where they are, I prefer to recommend the 30 year mortgage. For those homeowners who are disciplined, they will be rewarded by refinancing for 30 years and investing the difference. For a $100,000 mortgage at 4 ½ percent, the monthly payments would be $764.99 for 15 years and $506.69 for 30 years. By investing the difference and averaging a 7 percent annual return, the investment would be worth $81,871 at the end of 15 years. The balance due at the same time on the 30 year mortgage would be $66,234.

The total payments for the 15 year mortgage would be (180 x $764.99) $137,698. For the 30 year mortgage, the payment total would be (360 x $506.69) $182,408. It would appear doing the 15 year mortgage would be a wise decision, because $44,710 of interest is saved.

However, by doing the 30 year mortgage and investing the difference, there is more money for the homeowner. At the end of 15 years, the same amount has been spent (180 x ($506.69 + $258.30)) $137,698. But, the investment is worth $81,871, which could be used to pay off the 30 year mortgage and leave the homeowner with $15,637 in their investment account. ($81,871 - $66,234)

While it may appear smart to “save” $44,710 in interest, for the disciplined investor who will invest the difference each month just like it was the mortgage payment, they will have the greater net worth. The question becomes, would you rather have a paid off mortgage at the end of 15 years or the option to pay off a 30 year mortgage at the end of 15 years and still have thousands in the bank once the mortgage is paid? For this to work, the monthly investment must be made and treated like a mortgage payment. The investment account must also be left alone and not used to meet other interests or needs.

This strategy works very well when mortgage rates are in their current low range. If the rates were in the eight to nine percent range, then taking a 15 year mortgage would be like getting a guaranteed return of eight or nine percent.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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