Sometimes the best financial decision isn’t the most obvious.
In fact, sometimes the best financial decision isn’t even one you were considering at all.
For example: have you considered refinancing your mortgage?
If not, you may be missing an opportunity to pay less interest or increase your monthly cashflow. If you own your home, it is worth running the numbers with your financial advisor and mortgage agent regularly to determine if or when it might make sense for you to refinance.
My husband and I recently found ourselves in this position.
We were looking to purchase a second income property. Initially, we planned to fund the down payment for this new property with our investments. But as I ran the numbers for a few different scenarios, I noticed something.
The current interest rate for new rental mortgages was 1.57%. The interest rate on the mortgage for our current rental was 3.74% as we had taken it out when interest rates were higher. That is a significant difference, especially when you look at the entire amortization period.
(For example, on a $400,000 mortgage, the difference between 1.57% and 3.74% on a 30 year mortgage is over $161,000 more paid in interest!)
If we refinanced the mortgage on our current rental to take advantage of lower interest rates, we could save a substantial sum over the course of the amortization period.
But refinancing would mean paying the penalty on our current mortgage.
That penalty was… $16,000. The interest savings was about $41,000 in just the 5 year term alone!
The mortgage penalty ended up being substantially less than the interest savings we could gain from refinancing.
This option ended up making sense for many reasons: we left our liquid capital untouched and the lower monthly mortgage payment allowed for a buffer in our cashflow to address the unexpected costs that often pop up with a new property purchase.
For some of my clients, refinancing allows them to roll in older, significantly higher interest debt which allows them to free up a ton of cashflow for investing and building their wealth. That increased cashflow can then be put to work at a much higher return.
For example, one of my clients was paying 9% interest on an old line of credit debt she had accumulated. Her existing mortgage rate was 3.5%. By refinancing into a new mortgage, she could roll in her high-interest debt into a mortgage with a 1.5% interest rate. The money she freed up by doing that would be invested, and historically she’s received an 8% return. Although she would have to pay a penalty to refinance, ultimately, she ended up significantly ahead.
Refinancing to take advantage of lower interest means you can reduce your monthly payment and increase the rate at which you build equity in your home.
For example, let’s say you have a $400,000 mortgage with 15 years left:
- At a 3.74% interest rate, the monthly payment is $2,900
- At 1.57% interest rate, the monthly payment is $2,500
That gives you $400/month more to put towards your financial goals.
Over a 5 year term:
- At a 3.74% interest rate, you would pay $64,500 in interest and $109,500 towards the principal
- At a 1.57% interest rate, you would pay $26,600 in interest and $123,000 towards the principal
With the higher interest rate, you would end up paying more than double the amount of interest.
The lower interest rate means you would have more than $13,000 in additional equity.
An experienced financial planner is constantly considering these types of options. They check your goals against what options might be available to you – including options you may not have considered. And most importantly, they run the numbers in the short, medium, and long term.
What might seem like it costs more (paying a mortgage penalty, for example), may actually end up costing far less.
Book a call to see if there are ways you could be reaching your financial goals faster and making the most of your money.