Not all interest rates mean the same to everyone. When looking at rates it’s important to view them from more than one perspective. First historically: Are rates higher than they were 15 days ago? At the moment, yes. Second: Are rates much lower than they were 15 months ago? Most certainly. More importantly, you should view them as they relate strictly to you: What is my current rate? What are my long-term plans? And, more to the point: what does the math tell us?
Rates can often be an emotional trigger for many people, which is the opposite of what they should be. It’s just a number. What that number tells us is the important thing. A rate of 3.5% is more valuable to someone who is currently at 5.0% than it is to someone who is at 3.625%. People always want a lower rate, but it doesn’t always make sense. Are you paying costs to refinance? Are you already a few years into your amortization schedule? It’s all one big math equation and an expert can help you figure out what makes the most sense for you.
Additional Read: An Update To The Rate Market For You
While most people are battling to get the lowest overall short-term payment, some people are winning the long-term war by using their mortgage as part of their holistic approach to their financial planning. A mortgage is merely one part of your interconnected and life-long financial plan. What you do with your retirement funds, or for those planning for a child’s education, should be taken into consideration when deciding what to do with your mortgage. On a more real-estate-focused thought, what your long term plans are for the property need to be considered as well.
Examining shorter loan terms as opposed to a 30-year fixed is the perfect example. Let’s say a 15-year fixed rate is 3.0% while the 30-year fixed rate is 3.5%. There are obvious savings going from one to the other, one is short-term and the other is long-term. On a $300,000 loan using these interest rates, a person will save $112,054 over the life of the loan by taking the 15-year fixed. By investing that money, you can fund part of your retirement or pay for part or all of a child’s college education. These are significant and necessary funds.
That said, the extra $725 per month, is no small price to pay for saving all that money. One other option to consider is this: what if I can afford the extra $725 per month but I’d rather borrow the money at all-time low rates and invest it in the market where I can make more than 3.5%? After all, the people who have mastered this particular game have names like JP Morgan Chase and Bank of America so it’s not a horrible idea.
If you’re going to be in the loan for 5-7 years, then maybe that 15-year loan doesn’t make sense. Most of the savings you will reap, as compared to the 30-year fixed, will be from living in the home rent-free during the years 16-30. In the same way that equity isn’t real until you sell the home for a profit, savings also aren’t real until you compare one thing to another. That’s the reason why rates and loan terms can’t just stand on their own. They are a comparative math problem. Sometimes the solution is to do nothing. But sometimes the solution is to look at things a different way and discover that there may be an opportunity that you don’t want to miss.
Things to consider:
- Is the payment (approximately 40-45% higher) on the 15-year loan going to be too costly on a monthly basis? Or is it no skin off my back?
- Is there something else I should be investing this money in if I’m never going to pay off the loan?
- How long am I going to be in the loan?
- What if I can’t sell the home when I plan to move out and it makes sense to rent it at that point?
- Am I willing or wanting to be a landlord?
- What are my other plans for child education and/or retirement?
A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.