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This week, SPECIAL SHOW ALERT! Coronavirus is back as our special guest (with all due respect to its seriousness) and Pete and Damian dedicate the entire show to the recent spate of questions about refinancing due to the federal rate cut.
::whisper:: You should keep this link in your bookmarks — HEY MONEY!
Can’t listen? Check the Show Notes!
- What Happened: The Federal Reserve, our central bank, cut the rate by 50 basis points. In this case, it also means that mortgage rates fell substantially.
We want to show you how the proper utilization of your mortgage is a tool to better your financial life.
- Our Rule of Thumb: If you’re going to refinance to take advantage of better interest rates – if you can – reduce the TERM of your mortgage. (i.e. — from a 30 to a 15-year mortgage)
- THE TWEET: “Pete, we’re 5 years into a 30 year mortgage at 3.75%. We paid a lot of up-front interest at that time. The Credit Union is offering 2.8%, but the payment goes up $475 month, although it saves $120,000 in interest over time. Do we take it, or chip in $250/month into a 30-year now, or do we invest that money for a higher return elsewhere?”
- OUR THOUGHTS: Spreadsheets will tell you to have the lowest possible mortgage payment possible (from a monthly standpoint) and put the extra cashflow into the stock market. Over 30 years, you’ll have a side pool of money from the growth. IN REALITY: people don’t do that. We should, instead, offer new, more practical advice.
- The new, practical advice: When you refinance, cut your term! Why? Each payment matters more and you’re wasting less toward interest. Take a look at a 30-year amortization table one day. It will show you how your payments affect each facet of your mortgage.
On a $250K 30-year mortgage at 3.25%, the payment for principal and interest is $1,088.02.
On a $250K 15-year mortgage at 2.75%, the payment is $1,696.55.
The interest total on the 30-year to pay over the life is about $142,000. For the 15-year it’s just over $55K! That is a MASSIVE difference.We understand that everyone doesn’t have the best cash flow — the HEY MONEY team can help with that — but you have to look at the total cost to acquire the item including interest. With proper planning, you may be able to shift the way you look at mortgage in general.
Ask Yourself: HOW MUCH CAN YOU AFFORD (cash flow), and HOW MUCH DO YOU REALLY WANT TO PAY FOR IT IN THE LONG RUN?
Can’t make going down to a 15-year work? There are two other options. LISTEN TO THE REST OF THE SHOW TO FIND OUT what else you may be able to consider!
Click PLAY below to find out and to get your special offer code!
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.