Is it time to refinance and save money? Maybe. I have a lot of clients who call me with 30 year fixed-rate mortgages and think that just because interest rates have dropped a lot they are going to switch to a 15 year mortgage and keep their payments the same, and cut a lot of years off of their mortgage. This is likely not going to happen. Take a look at the numbers below to see why, they speak for themselves:
current hypothetical mortgage:
30 Year Fixed Rate
$500,000 @ 5.50%
$2838/month principal & interest payment (not including taxes and insurance)
new 15 Year Fixed Rate mortgage:
15 Year Fixed Rate
$500,000 @ 3.50%
$3574/month principal & interest payment (not including taxes and insurance)
So you can see that even with an enormous drop in interest rates, the payment actually goes up quite a bit. This is not to say that you are not going to save money over the long haul with the 15 year mortgage option at the lower interest rate, but you’re not going to save money every month. Here’s what I mean:
The current 30 year hypothetical mortgage costs $1,021,680 over 30 years ($2,838 x 360 payments = $1,021,6800).
The new 15 Year Fixed Rate mortgage only costs $643,320, that saves $378,360 over time! So if you will own a property for the long haul, or forever, paying it off more quickly, certainly at a lower interest rate, saves an enormous amount of money. But don’t expect to save money every month.