Real Estate Finance Alerts

6 Reasons Why You Should

Refinance to a 15 Year Loan

By Todd Huettner

The stock market hasn’t done much the last few months and you can barely get an interest rate worth the time. There is one place where you can invest your cash and easily beat the market with a guaranteed tax-free consistent return. The best part is it’s easy. Just refinance your mortgage to a 15 year fixed loan.

While you may dismiss it at first, here are six reasons why the 15-year fixed loan is a great option and how to make it work for you.

1.      You’ll Save a Ton – Consider a 2 year old $250,000 30 year fixed loan at 5.25% refinancing to a 15-year fixed at 4.25%. Your payment goes up $462.57 per month, but your loan goes down by even more.

I could just keep my loan and make the higher payment. Yes, but refinancing saves you far more.

Refinancing saves you even more than just paying extra on your loan.  If the 15-year fixed rate is 1.25% lower, the after tax return is 68%. At 1.5%, the after tax return is 88%. Very few investments can deliver that kind of return. Both sets of numbers include the cost of the new loan. Pre-Tax compares putting the money in another investment with a 25% tax rate.

2.      Better Return Than Stocks or Commodities – The average annual return for the S&P 500 over the last 60 years, after reinvesting dividends, is about 11%. Most mutual funds do even not beat the S&P average.

3.      Guaranteed Investment – As long as you make the payments, you save money. Guaranteed investments typically only pay 1% to 5%. With a 15-year fixed loan, you save no matter what happens to the economy.

4.      Consistent Investment – Stocks, real estate, and commodities will boom and bust, but your interest savings are steady as she goes which is a nice break from the ups and downs of the last few years.

5.      Tax Free Investment – The savings are not taxed. You are lowering your interest rate and paying down debt faster. If you put the additional payment into a CD or any other investment, the interest, dividends, or capital gain would be taxable. Even 401ks and traditional IRAs are taxed when you withdraw the money.

6.      No Wait and No Penalties – Take money out of a 401k or IRA before retirement and you have to pay a 10% penalty on top of regular taxes, but you can sell or get an equity loan at any time without penalty.

Traps To Avoid – These mind traps try to talk you out of a 15-year loan. Luckily, the solutions are easy.

·         “I will just pay more on my current loan.” Most people don’t. Refinance to a payment you have to make.

·         “The payment is just a little too high.” Tighten up your budget or put less into retirement each month.

·         “So, I should quit putting money in retirement and put it all into my loan?” No, you should still do both.

·         “But I am going to sell my house in 5 years.” Great! You will have a lot more equity when you sell.

·         “What if my house loses value?” You save the interest no matter what happens to the value of your home.

Refinancing to a 15-year fixed loan could just be the easiest and best investment you ever make.