Mortgage rates will go up this year.  (yes, a bold statement)

The government has been tapering off the purchase of mortgage backed securities and will finish at the end of the first quarter of 2010.  We all know that since the government started to purchase mortgage backed securities back in early 2009,the mortgage rates first dropped, and stayed, in the low 5 percent’s/upper 4 percent’s.

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Even today, we are still at historic low mortgage rates, but this party will come to an end.  Probably faster than most of us are even anticipating.  The only question that remains is, “How much will the mortgage rates rise?”, not “if” they are going to rise.

It’s extremely hard to say how investors will react to the sudden stop of the government’s actions, but the inevitable of mortgage rates rising will happen.

If you are considering a mortgage refinance into a lower rate, now is the best, and probably the only, time to lock in those historic low mortgage rates.

Read more about mortgage rates at:  History of the mortgage rates.

The ups and the downs…the ups and the down!

The mortgage rates continue on their typical roller coaster ride over the last few weeks.  At one point, we saw lenders at 4.5% on a 30 year fixed rate, then about a week ago the 30 year fixed rate was at 5.5%.  What a difference that can make on your mortgage payment!

Some of the best advice you will read about refinancing your mortgage will talk about lowering the interest rate.  Yes, low interest rates are what you should focus on, but don’t forget the many factors that should go into figuring out if a refinance benefits your situation.

What to focus on when looking to refinance.

Most of us live our lives month to month.  Why?  Our bills are due once a month and bills are a major part of our everyday life.  Because of this, most people just focus on the new monthly payment the mortgage refinance will give them.  There are other things you need to factor into your decision on whether or not you are going to refinance.

Here they are:

The amount of interest you will be saving over the life of the loan.

It’s a beautiful thing to be able to save $100 dollars a month on your mortgage payment.  That’s $1200 per year!  That’s a pretty nice savings.  Now, the amount of interest you will save over that first year will be in the thousands!  Tens of thousands over the many years you will have the loan.

Here is a good example of how much interest you can save with a refinance.

The amount of years you could reduce from the mortgage term.

This is something most people don’t even realize when they go to refinance their mortgage loan.  Some lenders will be able to put you in a 25 or 20 year mortgage loan and the interest rate is about the same.

For example, on a 150k mortgage at 5.5% on a 30 year, the payment would be $1135.58 (just principal and interest).  On a 25 year loan with the same terms, the payment is $1228.17.  That difference is only $92.59 per month!

Most of us won’t even consider refinancing the mortgage without saving $100 per month, so if you don’t need the savings, then reduce your term by 5 years.  You’ll be 5 years closer to the American Dream…owning a home free and clear!

 The amount of closing costs vs the interest rate.

Most lenders will be able to offer you higher closing costs for a lower interest rate.  Sometimes you can take a higher rate in exchange for lower closing costs.  You should take the time to look into paying more costs for a lower interest rate. 

If you have some equity in your home, you can even include those extra costs into the loan, so you don’t have to come out of pocket for those extra costs.  Take the time to figure out the amount of interest you will be saving, because if you are going to be in the home for the next 10 years or more, it could make a lot of sense to pay for a lower interest rate.  Here is a post that goes over an example on the amount of interest saved with a lower interest rate.

When looking at refinancing your mortgage, keep in mind that there are multiple factors when looking at the benefits of your refinance.

Don’t forget to check your credit report before applying for the refinance!

This question has been very popular among the people looking to refinance, since the mortgage rates continue to be at historic lows.  (I heard that someone locked in at 4.5% the other day…)

In all reality, there are two main things to consider when deciding on a 30 year mortgage versus a 15 year mortgage.

1.  The difference in monthly payment.

Consider the fact that the minimum payment on a 15 year mortgage will be higher than the 30 year mortgage.  If you are financially in a position to comfortably make the minimum payment on the 15 year, then we highly recommend the doing the 15 year mortgage.  Now, keep in mind the 30 year mortgage has a lower minimum payment.  If you are doing a standard conventional mortgage, it will not have a prepayment penalty for paying down or paying off the mortgage early.  So, it might be a good idea to go ahead with the 30 year and make larger payments when you can afford them, since there is no penalty for those extra payments or early payoff.

2.  The amount of interest you save over the life of the mortgage.

We are going to use this example to show some numbers: 
$200,000 mortgage at a 5.0% interest rate for both the 30 year and 15 year.

The total amount of interest you will pay over the life of a 30 year mortgage is $186,513.24
The total amount of interest you will pay over the life of a 15 year mortgage is $84,685.48

That’s a whopping $101,827.76 difference in interest you will pay!!

Ok, ok, I know what you are thinking and that’s “I probably won’t stay in this house for 30 or even 15 years”.  That’s ok, we’ve given an example of more real numbers.

The total amount of interest you will pay in the first 5 years of a 30 year mortgage is $48,076.13
The total amount of interest you will pay in the first 5 years of a 15 year mortgage is $44,009.37

That difference is $4,066.76.  Yes, just in the first five years of your mortgage you will save $4066.76, when you choose the 15 year mortgage versus the 30 year mortgage.  Again, if you can afford the 15 year mortgage payment, we highly recommend paying less interest over the life of the mortgage loan.

Here is something else to think about when deciding.  This is an example of how much more you will pay down your mortgage balance when deciding on the 3o year mortgage versus the 15 year mortgage.

Example:
You have a $150,000 loan amount and the interest rate is 5.0% on a 30 year mortgage. 

The principal and interest payment is $805.23.  Of that $805.23 payment, only $180.23 goes toward the principal balance of your mortgage loan.

Now, compare the same loan amount and interest rate on a 15 year mortgage.  The principal and interest payment is $1186.19.  Of that $1186.19 payment, $561.19 goes towards the principal balance of your mortgage loan.

In a full amortization schedule, the amount of your payment that goes towards principal increases each month.  For the sake of simple numbers, let’s assume the same amount of principal goes towards your balance each and every month.  Using the example of $150,000, the difference in the principal is $380.96.  ($561.19 – $180.23 = $380.96)  If you took $380.96 over the next year, that would equal $4571.52.  Over 5 years, that would be a whopping $22,857.60!!  Yes, that is how much you would reduce your mortgage balance over the next 5 years, using the example above.

We always recommend a 15 year mortgage, for another reason that you will pay down your mortgage balance faster.  Also, you usually get a lower interest rate on the 15 year mortgage versus the 30 year mortgage, so you will be paying less interest over the life of the mortgage as well.