Mortgage rates are the lowest they’ve been in history.
Last week, Freddie Mac announced that the average 30-year fixed rate mortgage is 2.98%. You don’t see many positive headlines out there, but this is something to be happy about.
My recommendation—if your mortgage is 3.75% or higher, you should refinance at a lower rate. Let’s run some numbers and see how much you could save…
Say you bought a house for $360,000. You put $60,000 down and took out a 30-year mortgage to cover the remaining $300,000. If the interest rate on your mortgage is:
4.0%, your monthly payment is $1,432
3.5%, your monthly payment is $1,347
3.0%, your monthly payment is $1,264
A $1,264 payment on a $300,000 mortgage is absolutely incredible. And it makes it more affordable to buy a bigger house.
Now, you are going to be tempted to buy a bigger house.
But do not buy a bigger house!
We’ve talked about this before with cars. People hear ads for 0.1% APR financing, and they run out and buy a much more expensive car than they need. You do not want to be one of these people.
You have an opportunity here to refinance and pay off your mortgage very quickly. This will save you a lot of money.
Your goal is to pay off your mortgage in 10 years, maybe even 5 years. And a lower interest rate can help you do that.
See, when rates are higher, interest makes up a larger percentage of your mortgage payment. When interest rates come down, you can pay down the principal much faster.
The easiest way to do this is by refinancing and sending in extra principal with every mortgage payment. For example, if your mortgage payment was $1,400, and refinancing drops it to $1,200, simply continue to send in $1,400 every month.
You don’t have to adjust your lifestyle or give anything up. Just keep doing what you were doing, and you will build up equity much faster, which is what you want.
When you send in additional principal, you also shorten the length of your mortgage. So instead of a 30-year mortgage, you have a 29-year mortgage, or a 28-year mortgage, etc.
The more additional principal you pay, the shorter your mortgage gets, until you finally pay it off.
If you’re shopping for a house right now, or refinancing, I encourage you to lock in the interest rate.
The reality is no one knows what’s going to happen with interest rates. They’ll likely stay low for a while, and they might go a tiny bit lower. But at some point, rates will go up.
Plus, a 3% interest rate is absolutely incredible. For perspective, when I bought my first condo back in 1999, the interest rate on the mortgage was 7.25%, or more than double what it would be now.
Remember, mortgage rates are the lowest they’ve been in history. And you can’t predict the future. So take advantage of this unprecedented opportunity and lock in an ultra-low rate now.
The point of everything we discuss here at Jared Dillian Money is to help you live a stress-free financial life. Some people will use the lowest mortgage rates on record to buy a much bigger, much fancier house than they need (or possibly even want).
That is not going to reduce their financial stress. It is not going to make them happier.
However, refinancing and paying off your mortgage as quickly as possible—ideally in 10 years or less—will reduce your financial stress.
And it will make you happier! As I’ve said before, there is no substitute for the peace of mind that comes from living in a house you own free and clear.
By the way... building home equity can also help round out a diversified investment portfolio. I talk about this at length in The Awesome Portfolio. If you’ve read the special report, you know that real estate is one of the five types of assets in the Awesome Portfolio—which is really the ideal portfolio for everyone, even if you’re just starting to invest. Get all the details by clicking here.
Jared Dillian