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Are You Reviewing Your Rate Every Year?

February 18, 2001|PETER BOUTELL | SPECIAL TO THE TIMES

A 30-year mortgage is one in which the lender is allowing the borrower to spread the payments over 30 years; it does not mean that you have to keep it for 30 years. In fact, most homeowners replace their mortgages on the average of every five to seven years.

People refinance for many reasons. The most popular reason is to lower the interest rate, which lowers the payment, which in turn leaves more cash left over at the end of the month.

When consumers buy a home, they must select a mortgage that they feel is the best one available for their particular situation. On any given day, there are literally hundreds of options to choose from. Furthermore, because rates change every day, just like the stock market, there are hundreds of new options available daily.

It is a good policy to review your mortgage every year. Do you have a second mortgage that you would like to pay off? Are you still paying mortgage insurance? If you have an adjustable-rate mortgage, now may be a good time to replace it with a fixed-rate mortgage. If you replace your existing mortgage with a bigger one, you can create cash to do anything you want.

Another reason to refinance is to shorten the term on your mortgage. Interest rates on 15-year mortgages are lower than rates on 30-year mortgages. However, you do not need to refinance to simply pay off your 30-year mortgage in 15 years.

As a rule of thumb, if you increase the principal and interest payments on your 30-year loan by 35%, you will pay off your loan in 15 years. For example, to pay off a $250,000 mortgage at 7% in 30 years, the monthly payments must be $1,331. To pay it off in 15 years requires a payment of $1,798. If this loan is paid off in 15 years (versus 30), the borrower will save $155,582 in interest.

While there is a cost to refinance, there are three ways to come up with that money. A borrower may either increase the loan amount to cover those costs, pay for them from savings or, if a slightly higher interest rate is selected, the lender will pay all or a portion of the borrower's closing costs.

When refinancing, be sure to compare the term of your new loan with the term of your existing loan. If you have only 25 years to go to pay off your existing mortgage, the payments on a new loan may look good to you only because you are spreading those payments over 30 years again.

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Peter Boutell is a loan officer and a principal with a Santa Cruz mortgage company. Questions may be sent to peter@santacruzmortgage.com.

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