Mortgage Rates In Perspective
By Reed Kawai Myers
Principal at Myers Capital Hawaii
We’ve all heard in some form or another of the 1 percent rule regarding your home mortgage. Generally put, the rule of thumb is you must drop your interest rate at least 1 percent (in some cases I’ve heard 2 percent) for refinancing to make sense.
This could not be further from the truth.
With mid-level to large loan amounts — as Hawaii homeowners know more often than not — there is much greater leverage that compounds the savings effects of even slight interest rate reductions. By lowering your interest rate 0.5 percent or even 0.25 percent, this can make a significant impact on your monthly payment, interest paid over time and even helping fund your retirement account.
Take the following example: with a $500,000 mortgage and an interest rate of 4.5 percent, you will pay $412,032 in interest over the life of the loan. If you take this same scenario and only lower your rate half of a percent down to 4 percent, you would have paid only $359,346 over the life of the loan, totaling a savings of over $52,000. You can even tweak this further to squeeze out substantially more savings. By simply matching the mortgage payment that you currently make (with your 4.5 percent mortgage) to your new 4 percent mortgage, you would pay off your mortgage four years earlier. Four years of no mortgage payments would result in more than $100,000 in savings — savings that should be in your retirement account, not your lender’s.
Another common misconception is the idea that you always have to pay “closing costs” or “points.” Depending on your qualifications as a borrower, you may be eligible for programs with reduced or even zero closing costs.
Many times this is in exchange for taking a slightly higher rate than the best offered rate. However, as long as the corresponding rate is still lower than your existing rate, you are essentially dropping your interest rate at no charge.
Today, make the decision to do your due diligence with lenders, empower yourself as a borrower and a consumer and take advantage of this low mortgage rate environment. The results will make an incredible difference in your financial future.