Recommendations:

1. Check your break-even point on a refinance
2. Refinance (if it makes sense) while rates are low

Annual Savings Potential: Can be thousands of dollars/year

Discussion   Mortgage rates are at levels that haven’t been seen in 40 years or more.  The weak economy, coupled with government efforts to push rates down to make housing more attractive, is making this a once-in-a-generation opportunity for those with good credit to refinance.    The first thing to look at, of course, is whether current mortgage rates are lower than what you are currently paying.  If not, then there’s nothing to see here (unless you are on a variable rate that may spike up in the not-too-distant future).

For most people, current rates provide an opportunity to save tens of thousands in interest over the life of a mortgage.   However, because there are front-loaded costs associated with most mortgage financing, it isn’t as simple as comparing rate A to rate B.   At a high level, here are the two approaches you can take:

• If you plan on staying in the home for many years, look for the lowest interest rate option offered by your bank.  You may have several options, with lower rates coming with more origination costs (points).   You’ll pay more today, and your break-even period will be longer but you’ll end up paying the least interest in the long run
• If you don’t know how long you’ll stay in the home, or want to minimize out-of-pocket costs at closing, shop for the lowest rate that includes 0% origination fee.   In this scenario, your break-even is sooner, although your monthly payment will be a bit higher and, if you end up in the home for a long time, you’ll pay more interest.

Another suggestion to minimize out-of-pocket costs at closing is to have them rolled into the loan.   This will increase the principal balance (amount you are borrowing), slightly increasing your monthly payments.

I received a letter from my mortgage company earlier in the week that contained a fascinating proposal. If I were to take my monthly mortgage payment and pay half of it every two weeks, I could pay off my mortgage six years early, and save tens of thousands of dollars in interest.

By itself, this isn’t such a bad idea. The reason it works is that by paying every two weeks, you end up making 13 full mortgage payments a year, instead of 12. This accelerates your repayment of principal.

The idiotic part is that the bank wants me to pay $295 to enroll in the program and then pay $5.42 a month in participation fees. If I were to participate until my mortgage was repaid, that would be a total of a little over $1,800.

Okay, let me understand this….. the bank is asking me to pay $1,800 for something I CAN DO MYSELF!! This is truly remarkable and (in my opinion) a completely irresponsible promotion.

If you are interested in doing something like this, it is very simple to set up, especially if you have online banking. Just set up a recurring payment of 1/2 your mortgage payment every two weeks and you are done. 30 seconds of work and you’ve saved all that interest plus $1,800. By the way, there’s nothing magical about every two weeks, either…. you can make these extra payments whenever you want. The more principal you pay early, the less interest you’ll have down the road.  To see how much you can save by prepaying, use this calculator. 

Obviously, you’ll want to make sure that there are no prepayment penalties associated with your mortgage before embarking on an early repayment program like this.