Saturday, July 10, 2010

Save money by refinancing all your debt

If you pay attention to the financial markets you probably heard that interest rates reached a 50 year low this week. I will leave it to the economists to discuss whether this is good for the economy or not, but for the average individual, this is a great news.

Most people in the U.S. owe money on their houses, and many people owe money on cars, credit cards, and school loans. For the purpose of this blog I'll primarily discuss why you should refinance your house right now, but almost any debt can be refinanced if you find the right lender.
Most people who are paying a 30 year mortgage on their house are paying about a 6.5% interest rate. This rate is usually a fixed rate that will remain exactly the same for the entire 30 year period. The exact rate you have will vary depending on what it was when you bought the house, but it won't change over time. Howtomakeadollar owns a house with a 5.875% interest rate. This was considered to be an historic low when the house was purchased, and Howtomakeadollar felt very good about the rate. However, this week the average rates are down below 4.5%, which is outrageously, astoundingly low, and some discount lenders are as low as 4.1%, which has never happened before in the history of the world. (seriously)

Lets say you owe $300,000 on your house. If you are paying this on a 30 year loan at a 6.5% rate, then your monthly payment will be 1896.20. Of course, when you factor in taxes and insurance, your payment will actually be significantly higher than this, but you don't have much control over those costs.

You do have control over your interest rate. Right now, if you refinance the same amount and qualify for a 4.1% rate, your payment will be 1449.60. So if you have a 6.5% rate you will pay 1896.20 per month, and if you refinance right now, you will pay 1449.60 per month. Thats $446.5 in monthly savings. It will take about a 30 min phone call, and some paperwork, but this rate will be fixed for the life of the loan, meaning you save $446.5 every single month for 360 months. Thats $160,776. Its definitely worth a phone call and some paperwork. Howtomakeadollar is in the process of refinancing its house today, and I recommend you do the same. 

There are a few caveats of course. Lets say you have already made payments on your house for 5 years, so you only have 25 years left. By refinancing you will now be back to 30 years, which means that you will be paying interest for a total of 35 years (5 already paid, plus 30 more) This means that the total interest paid over the 35 years may be higher than what you would pay on the current plan over the next 25 years. If this is the case, then I recommend refinancing down to a 20 year or a 15 year loan. This will give you an even lower interest rate, and will pay off your loan in a shorter period of time. It may not save you money every month, but you will get an even lower interest rate (probably in the low 3s), so you will be paying the same amount you currently pay, but for fewer years.

If you decide to refinance you should shop around for the lowest rate that you qualify for. All lenders that I have dealt with require the same four things, so you may as well have everything ready.
you will need:
1. A copy of your last monthly mortgage statement
2. W2 forms from 2009 and 2008
3. Proof that the house is insured
4. Two recent pay stubs
I could talk for hours about the logistics of this and how to calculate your costs, but Its getting late.

Here is a helpful mortgage calculator that lets you experiment with interest rates

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