Who Wants an Extra $100,000?
A penny saved is a penny earned, and if you're like me, you would rather make money by doing very little than by making money by the sweat of your brow. There are a lot of people who could be saving over $100,000 just by making the right moves on their home mortgages. Take the case of a friend of mine who was complaining about being spammed in his e-mail, and having a mailbox full of junk mail, from mortgage companies trying to get him to refinance his house. He doesn't want to have anything to do with refinancing his house at this time, because he says the closing costs are wasted expenses. In lots of cases closing costs are wasted expenses and make refinancing not practical. After finding out about his particular situation, however, I think he would be wise to look into refinancing. I'm not the kind of a person who goes to someone's house and tells him or her how to run the family finances but I hope he reads this article.
Here are the facts in my friend's case. He has a $220,000 mortgage. He took it for a 30-year term at 8 percent, when 8 percent was a very good rate. This makes his mortgage payment, without escrow added, $1,614.28 He has been paying this mortgage for eight years. So, if he pays off this mortgage monthly for the rest of the term, 22 years longer, he will pay from this point on $426,169.92.
Now let's suppose he was able to get a 15-year mortgage at 5.5 percent and he decided to refinance at that rate. Let's say he finances the whole $220,000 and pockets the $19,961.32 of principle that he has already paid off. His monthly payment on this mortgage would be $1,797.58. Though this mortgage payment is an increase of over $180 a month, I'll bet you that if he was able to pay over $1,600 a month eight years ago, he will be able pay almost $1800 a month, now.
Let's see how this mortgage refinance will work out for him over the long haul. First, the total amount of money he will be paying out to pay off this loan in full would be $323,564.40. This is a savings of $102,605.52 over the $426,169.92 it will take to pay off the mortgage he has now. Add to that the fact that he would have pocketed almost $20,000 at the refinancing closing. Then add to that the fact that he will have seven years of making no payments after this mortgage has been paid, instead of the $1,600 a month he would still be paying had he not refinanced. Imagine how much money a person could make if he was putting $1,600 a month into a really hot mutual fund! One that was averaging 15 percent would net him a cool $200,000 over 7 years! Wow!
There are other ways to save $100,000 on mortgages. I find that different mortgage companies have different rates. Sometimes these rates vary as much as two percent from lender to lender! Let's take a case for someone who has just bought a home and is mortgaging his new home without really shopping around too much and locks in a rate at 7 percent. These new homeowners are mortgaging $300,000 for 30 years. Their payment will be $1,995.91 each month. Suppose these homeowners had really looked all over and found a rate of 5.25 percent and had taken this one instead. Here the same term for the same amount would cost them $1,656.61 a month or a difference of $339.30 per month. Over the course of 30 years this is a difference of $122,148! The lesson here; shop around!
One more way a person can save $100,000 on his mortgage, in many cases is just by paying a little more principal each month. In some cases a little bit truly goes a long way. If someone had a mortgage for $220,000 at seven percent for 30 years his payment would be $1,463.67 per month. Even if he has been making his payment for several years and still has 312 payments to make, what would happen if he decided he could pay $320 a month more? The answer is, by making this additional payment on the principal each month he would make a total of 112 fewer payments. This would result in a total savings of $100,525.25.
As you can see, playing around with the numbers on your home mortgage can be very beneficial to your financial health. Who knows, you may even pocket an extra $100,000 or so!