Mortgage Tips, Tricks & Secrets

If you’ve been asking the question “should I refinance my home loan” when everyone is talking so badly about the current mortgage market - I just might have an answer for you.

I was reading email this morning and saw the following headline;

“Rates are Still Low - Refinance and Start Saving!”

Well, doesn’t that just fit into the stupid home owner mentality!

Refinancing with your current lender isn’t always about getting the lowest interest rate or even saving money.

Often times there are much better questions to ask when refinancing as opposed to ONLY the lowest rate.

Here’s why you SHOULD be thinking about a loan refinance.

Believe it or not, you can actually refinance at a higher interest rate than you have now and still “save” money.

Look at this simple example of why refinancing your mortgage can always be a good idea.

If my current mortgage is financed at 6% and I refinance at 6.25% while pulling out $50,000 cash - I can re-invest that cash at 6.25% return and still save money.

The savings come into play when you look at the tax implications of loan refinancing.

The power of tax preferred borrowing and investing comes with a common myth conception which says;

“borrowing funds at a particular interest rate, then investing them at the same or lower rate, holds no potential growth returns.”

The truth is, you can create tremendous wealth by borrowing money at a particular interest rate and investing it at the same interest rate or even less provided two conditions exist.

1. the interest paid on the borrowed money is deductible
2. the investment used earns compound interest

AND…if you invest in a tax favored investment the potential for growth is even greater.

How can this be true?

Simple, you borrow at 6.25% and invest at 6.25% (for example), and due to the interest tax deduction for pulling cash out of your home the effective interest rate you are really paying is say 4.5%. That’s a net gain of 1.75% on your money that’s invested at the same rate you borrowed at.

You might even be having an ah ha moment here and saying to yourself, wouldn’t I save even more if I had an interest only mortgage when refinancing my house? In fact you would. (assuming you maintain control of your refinancing costs)

Even though interest only loans like the 30 year fixed (which allows the interest only payment for 10 years) come with slightly higher interest rates - the extra savings in monthly payment go a long way if you invest in a tax favored investment which compounds year after year.

In conclusion, it’s time to stop believing headlines about refinance loan rates still being low and that you can still save. It makes the typical home owner miss the real point which is; as long as there’s value in your home you can refinance and save no matter what the interest rate is doing on a daily basis.

Home equity loan refinancing doesn’t always carry the same advantages due to the higher rates, however you can find investments that meet the same compound savings criteria.