The Treasury Department is working on a plan that would lower interest rates on 30-year fixed mortgages to 4.50% APY. They would do this by purchasing mortgage backed securities from Fannie Mae and Freddie Mac, thus increasing demand and forcing mortgage rates down. Regardless of what you feel about this plan, the thought of 4.50% APY mortgage interest rates should appeal to anyone who owns a house or wants to own a house in the next few years. 4.50% APY is an unheard of rate for a thirty-year fixed mortgage, taking advantage of it could leave you smiling for years when you look back at how you made lemonade out of all these economic lemons.
My advice for anyone who seeks to take advantage, start saving now. You’ll want to save up your war chest for either the refinancing closing costs or the home purchase closing costs. Either way, you want to be in a position to take advantage should this plan go through.
My wife and I have lived in our home for three years and we absolutely love it. The current interest rate on our 30-year fixed mortgage is 5.75% APR, or around 5.9% APY. Should Treasury push rates down to 4.50% APY, it would seem like a no-brainer for us to refinance, assuming reasonable closing costs.
I entered in some data into Dinkytown.net’s Refinance Breakeven calculator (assuming only 1% for closing costs, which matches some quotes online) and the results were good. After eight months, the money saved on my lowered monthly payment would exceed the closing costs. After sixteen months, the money saved after payments and interest payments exceed closing costs and what would’ve been saved prepaying the mortgage. The sixteen months is the figure I’m most interested in because it takes into account how we went from a 27 year mortgage all the way to a 30 year mortgage. Seems great right?
Looking at the refinancing summary (after you click “View Report”), I see that I only save $4,680 in total interest across thirty years. That was surprising. Saving $5,000 over thirty years isn’t worth the hassle of refinancing, so I changed the loan terms to a 15-year fixed with the same interest rate. The sixteen months from before dropped to 15 months (not surprising because the payment amount goes up) but the total interest saved is over $100,000. The monthly payment goes up a little bit but it actually matches how much we pay currently, so we may consider refinancing to save that $100,000.
Several things worth mentioning:
- This is just an estimate, I think that if you are serious about it then you should get some actual quotes with real closing cost figures. Is 1% too low? Is it a reflection of how an online quote is sometimes just a way to get you on the phone with an agent?
- The Treasury plan only talks about 30-year fixed mortgages but I’d imagine 15-year fixed mortgages would drop too. Despite the calculations I made that confirmed a 15-year mortgage is the same as a 30-year mortgage with extra payments, having a 15 year on the books seems to “force” the prepayment, thus forcing the interest savings.
- We may or may not be living in this house for the next fifteen or thirty years. However, we shouldn’t let the unknown make our decisions for us. I suspect we’ll know in the next few months whether we’d like to move and if we do, that will drive our refinancing decision should this plan drop interest rates to these great levels.
We’ll be waiting to see if this plan does lower rates and to see what our future plans are but sagging home prices and low interest rates make for a very appealing time to buy a home.