SURE, THE MEDIA HAS NOTHING BUT negative news lately regarding the real estate market, but if you look closely and pay attention to the interest rates you’ll see something interesting: rates remain low!
The media loves to perpetuate negative news. That is not to say that the current real estate environment, both in the market place and financially, are not having a tough time. It is expected that fourth quarter and annually earnings for many lenders will be down substantially. This is due in part to the subprime meltdown that took place a few months back. However, the market place is expecting the Fed to cut the Fed Funds rate at the end of the January when they meet again. Aside from this expectation, the current market place for interest rates is excellent. Sure, many people have the mind set that a 3 or 4 percent interest rate is great and anything else is simply too high, but if you look at the interest rates of today you will notice that many are hovering around 6 percent. This is much lower then historical averages once you factor out the past few years of record breaking lows.
A 30-year fixed loan, which is a loan where principal and interest are paid together each payment and the loan is paid off in full at the end of 30 years, is hovering around 5.625 percent. A 15-year loan, which is identical to a 30-year fixed with a term of only 15 years, is hovering around 6.10 percent. This is in comparison to a couple of months ago when rates were in the mid to upper 6 percent range. Of course, this half a percent does not sound like a lot until you do the math.
If you were refinancing your home and decided to take a 30-year fixed loan at 6.375 percent on $500,000, your payment per month would be $3,119.35. Now if you waited and did that refinance today at an interest rate of 5.625 percent your payment would be $2,878.28 a difference of $241.07 a month or $2892.84 a year. Now that may not seem like a lot, but if you take that additional $2892.84 and multiply it by 30 years the difference grows to $86,785.20. If you were to take that $241.07 a month and place it into a savings account with an 4.5 percent interest rate compounding annually, after 30 years you would have $184,000. Sure in today’s world that may not seem like a lot of money, but if you did this after 30 years you would have a free and clear house, which would be worth at least double what you paid and $184,000 in cash. Conservatively speaking you would now be worth over a million dollars ($1,000,000 home value + $184,000 = $1,184,000). On top of that you would have gained the benefit of a tax deduction while you were paying down the mortgage.
Some people are more aggressive and would rather pay a mortgage down in 15 years. Paying off a mortgage over 15 years will cause your monthly payments to be higher, but you will save money on interest over time since your home is paid down at a faster rate.
Regardless of all the negative media coming out on the real estate market, now may be a great time to consider refinancing your home and locking up a conservative 30-year fixed loan.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on January 16, 2008. Read the original PDF.