Episode 127: What considerations go into choosing a mortgage interest rate? When should you lock into a rate? Sean sheds some light on locking into a mortgage rate and paying down the interest at closing on this episode in the Where Our Money Went series.
Kevin got a tax refund from the state of Virginia. Everyone got a refund, as the state apparently took too much money from everyone last tax season. The money is going toward maxing out his wife’s IRA for the year.
Choosing a Mortgage Interest Rate
Sean’s money is going toward homebuilding. At the time when he called originally, he was offered to lock in at a low mortgage interest rate. However, he took a gamble and decided to wait. Fortunately, rates have lowered to 2.875%.
Paying Down the Mortgage Interest Rate
Sean was offered the opportunity to pay an extra $3000 at closing to lower the rate to 2.625%. Sean crunched the numbers and determined it would take 8-10 years to recover the $3000. It makes sense if you’re going to stay in the house for more than eight years (or pay the mortgage for that long). It ultimately saves about $30 per month.
Investing the Mortgage Interest Savings
One of the considerations is the opportunity cost for the $30 per month. If he puts this money down, it might not make a difference. However, it’s also $30 more a month that can be worked into the cash flow or invested. If Sean invests the $30 per month, he’d have an extra $7,000 saved by the end of the eight years.
There are calculators available online to help you determine when the payoff would occur, but those don’t calculate the investment opportunity. Take the time to run the numbers yourself, rather than relying on a calculator or investor.
Refinancing and Planning
If you plan on moving or paying off your mortgage early, it doesn’t always make sense to pay down your mortgage interest rate. Run a few scenarios and see what works for you.
As a resource, look at the 10 Year Treasury Note to get an idea of rates.