By Lisa Scontras
Many homeowners are in the process of weighing the advantages of remodeling a room in their home versus cutting back on expenses and reducing the total money spent to pay off debt. What if you could do both?
Recently, a First Hawaiian Bank borrower took out a second mortgage for $150,000 to upgrade the family’s 1960s Hawaii Kai townhome. After the remodel was complete, the homeowners noticed interest rates were down to 3.5 percent and wondered how much money they could save by refinancing their 5.5 percent first mortgage. Then they thought, what if we were to keep our first mortgage payment exactly the same, but wrap in as much of the remodel costs as possible?
Harnessing the power of equity together with taking advantage of rock bottom interest rates, they were able to wrap in nearly $100,000 of the remodel costs into the first mortgage — keeping their original first mortgage monthly payments the same simply by refinancing.
With the right mix of low interest rates and equity, Leonard Fernandes, assistant vice president and manager of the residential credit center at First Hawaiian Bank, says that, yes, it’s possible to remodel your home and then wrap these costs into your first mortgage. “This is a great example of how this borrower increased the first mortgage balance and consolidatedahigherinterest second mortgage debt into the first without an increase in monthly payment,” says Fernandes. “This is another benefit of the low rates.”
The Great Recession has dramatically changed the way millions of families manage their money and their debt. They are thinking outside the box and cleaning up their balance sheets by reassessing the way interest rates affect their bottom line. Many have found that by refinancing their mortgage, they are sitting on a gold mine.
Here are five ways to save money by refinancing:
1. SAVE MONEY BY LOWERING YOUR MONTHLY PAYMENT
“Rates are extremely good right now,” says Fernandes, who gives this example. “If a customer obtained a 30-year fixed mortgage loan at 5.5 percent three years ago for $300,000, the monthly payment would be $1,704. Refinancing to a new 30-year termat3.5percent,youreduce your monthly payment to $1,348 — or by $356.”
A $356 reduction in monthly mortgage debt (nearly $4,300 a year) is significant, which is why homeowners should take the time today to refinance while rates are low.
2. SAVE MONEY BY REDUCING THE INTEREST PAID OVER THE LIFE OF THE LOAN
Using the example above, the current balance on the loan opened for 36 months would be $287,180 in remaining interest for the next 27 years to total $264,712.
“If you take that balance after three years of payments, and calculate payments of a new 30year fixed rate at 3.5 percent, the total interest paid is $177,064,” says Fernandes. “So even though you are adding three more years to the term of your loan (by going back to a new 30-year loan after you have paid for three years), your total interest paid at the end is reduced by over $87,000.”
Does paying $87,000 less in interest appeal to you?
“The above example shows that customers can benefit both by reducing their monthly mortgage payment and by reducing the total interest paid,”hesays.“Theyarenot simply saving because they are stretching out the terms to reduce the payment.”
Borrowers are encouraged to understand that these are two ways to save. The monthly payment is decreased and the total interest paid is decreased.
3. KEEP YOUR CURRENT MORTGAGE TERM
Let’s say you have already paid 10 years on a 30-year mortgage and you don’t want to reset the clock back to 30 years. Here is how Fernandes crunches out that scenario:
“If you opened a 30year fixed mortgage 10 years ago at 5.5 percent for $300,000, your payment would be $1,704,” he says. “After 10 years, your principal balance would be $247,623, and remaining interest $161,186. Now if you take that same balance and refinance at 3.5 percent for the remaining 20-year term, your monthly payment is reduced to $1,437 and your total interest is reduced to $97,045. You reduce your monthly payment by $267 a month and reduce your total interest by $64,142.”
4. IMPROVE YOUR CREDIT SCORE
When applying for a mortgage, the lender will pull your credit report and review your credit history. The higher your score, the more comfortable a lender is that you will repay your obligation on time. Generally, a score of 640 and above is considered to be good credit. Below that, and you may have to pay more. Your lender can discuss the specifics of pricing with you.
5. KNOW WHAT TYPES OF DISCOUNTS YOU QUALIFY FOR
“Borrowers need to know what type of discounts apply to them,” says Fernandes. “For example, at First Hawaiian Bank, if you have our Priority Banking PlanSM checking account, you can qualify for additional discounts on your closing costs.”
Being thrifty is a great way to save money. Homeowners can benefit from low interest rates in so many ways.
“Low rates can increase disposable income by lowering the monthly mortgage payment, or it can help the customer qualify for a larger loan at the same payment,” he says. “Or, you can take cash out for debt consolidation, school tuition or home improvement, at no increase in your monthly debt payment.