We understand that we are stewards of all that God entrusts to us, including our finances. This means that part of being the bond servant of the Lord, and part of living out the gospel in our lives, relates to how we use our money. So, I write this article as a pastor not as a banker or financial advisor with some hidden motive. I hope it helps you live out the gospel.
We all know that our savings accounts are just fancy mattresses right now. After all, the interest rate at the bank and the interest rate in your mattress is the same – nothing! If you cannot do anything about the saving side (and you certainly might, but that’s a different post), is there anything you can do on the owing side?
To put it another way, can you take advantage of overall lower interest rates on your mortgage? (Even if getting good interest rates on savings accounts, CDs, or money market accounts is virtually impossible).
The answer: Maybe.
Just to be frank, my wife and I bought our first house in 2002 and our second in 2005 (our current home). In less than 10 years, I have had 4 mortgages and I am contemplating doing another refinance. I have been through the refinance process two times and here are some of the factors that I would recommend you take into account in the decision making process:
#1: Remember that buying a home involves both a monthly payment and a total cost
When you sign a mortgage agreement the bank is required to show you the amount you will pay over the course of the loan. For example, a $150,000 loan, amoritized over a 30 year fixed rate of 6%, costs the consumer about $325,000.
The goal of a refinance can be to simply lower the total cost of the loan. A 5% loan, under the same conditions, would cost just over $290,000 (a savings of $35,000 over the life of the loan)!
If the person kept the same payment then the loan would cost about $260,000, saving the person about $65,000 and 6 years of loan payments.
It should be clear that a refinance can really help you steward what the Lord has given you. It could also help you deal with consumer debt if that were your situation. But I hope we all see that if we can lower our debt amount it can result in significant savings.
#2: Remember that if you commit to paying your current mortgage amount you will reap the greatest benefit in total cost savings.
In the previous example, the 6% loan required a payment of $899.33 while the 5% loan required a payment of $805.23. If, however, the person refinanced their loan and continued to pay the original mortgage amount ($899.33), they would reap a $65,000 reduction in payments and a loan that would be paid off in less than 25 years instead of 30.
If you are willing to make this commitment, then a refinance may be a great option for you.
NOTE: There are closing costs of about $1,000 on refinances. This certainly needs to be factored in to your situation, but I would spend $1,000 to save $65,000 any day.
#3. Create an amortization schedule on your current rate and the new finance rate to calculate a true saving amount.
Of course, my examples were starting on day 1. You, however, have already been in a loan and have paid a certain amount of the principle already. Therefore, I encourage you to create an amoritization schedule of your current situation, and the refinance situation (if you choose to go that route). You can do this work on the web, using tools such as this amortization schedule calculator from Bankrate.com.
Below are two schedules that I put together in Excel. The first assumes a steady payment while the second allows you to change the amount you pay on a monthly basis if desired.
The only tricky parts to this schedule are (1) You need to use the dollar sign on the formula to ensure it does not change as you copy rows (e.g. your interest column = loan amount * interest rate [$b$3] /12; your principle in turn is payment ($b$5 – interest)).
| Amount of the Loan | $150,000.00 | Loan Amt | Interest | Principle | Payment # |
| $149,850.67 | $750.00 | $149.33 | 1 | ||
| Interest Rate | 6.00% | $149,701.34 | $748.51 | $150.82 | 2 |
| $149,550.52 | $747.75 | $151.58 | 3 | ||
| Payment | $899.33 | $149,398.94 | $746.99 | $152.34 | 4 |
| $149,246.60 | $746.23 | $153.10 | 5 | ||
| Total Cost | $323,758.80 | $149,093.51 | $745.47 | $153.86 | 6 |
| $148,939.64 | $744.70 | $154.63 | 7 | ||
| $148,785.01 | $743.93 | $155.40 | 8 | ||
| $148,629.61 | $743.15 | $156.18 | 9 | ||
| $148,473.43 | $742.37 | $156.96 | 10 | ||
| Loan value at 10 years | $125,529.24 | $148,316.46 | $741.58 | $157.75 | 11 |
| Loan value at 15 years | $106,573.86 | $148,158.72 | $740.79 | $158.54 | 12 |
| Loan value at 20 years | $81,005.88 | $148,000.18 | $740.00 | $159.33 | 13 |
| Loan value at 25 years | $46,518.51 | $147,840.85 | $739.20 | $160.13 | 14 |
| Loan value at 30 years | $0.22 | $147,680.72 | $738.40 | $160.93 | 15 |
The amortization for a changing payment is very similar, but your principle column is your actual payment amount each month rather than the $b$5 payment.
| Amount of the Loan | $185,000.00 | Loan Amt | Interest | Principle | Payment # | Payment Amt. |
| $184,765.83 | $770.83 | $234.17 | 1 | $1,005.00 | ||
| Interest Rate | 5.00% | $184,531.67 | $768.88 | $225.44 | 2 | $994.32 |
| $184,306.23 | $767.94 | $332.06 | 3 | $1,100.00 | ||
| Payment | $994.32 | $183,974.17 | $766.56 | $227.76 | 4 | $994.32 |
| $183,746.41 | $765.61 | $228.71 | 5 | $994.32 | ||
| Total Cost | $357,955.20 | $183,517.70 | $764.66 | $229.66 | 6 | $994.32 |
| $183,288.04 | $763.70 | $230.62 | 7 | $994.32 | ||
| $183,057.42 | $762.74 | $231.58 | 8 | $994.32 | ||
| $182,825.84 | $761.77 | $232.55 | 9 | $994.32 | ||
| $182,593.29 | $760.81 | $233.51 | 10 | $994.32 | ||
| Loan value at 10 years | $150,091.93 | $182,359.78 | $759.83 | $234.49 | 11 | $994.32 |
| Loan value at 15 years | $125,001.97 | $182,125.29 | $758.86 | $235.46 | 12 | $994.32 |
| Loan value at 20 years | $92,802.56 | $181,889.82 | $757.87 | $236.45 | 13 | $994.32 |
| Loan value at 25 years | $51,479.16 | $181,653.38 | $756.89 | $237.43 | 14 | $994.32 |
| Loan value at 30 years | -$1,553.59 | $181,415.95 | $755.90 | $238.42 | 15 | $994.32 |
You can see that I changed the payment amounts and my loan value is negative at 30 years. This means I will pay off the loan early.
#4. Understanding the data
Now it is time to land this plane and provide some basic advice:
- How long you plan to stay in your home affects whether refinancing is a good idea. The longer you plan to stay, the more you will reap the benefit of the lower rate. You should be able to regain your closing costs in 1-2 years. The same goes for those of you who are about to payoff your loan. The shorter the time, the less possible savings is there.
- Your credit history and rating. Banks are more cautious these days. Refinance rates are very low, but competition is stiffer for those rates. Some folks simply will not qualify. It should never cost you money to find out if you qualify, so please ask.
- There is a general rule of thumb that a 1% interest drop is worth the time to run all the numbers. If you are not getting 1% it might not be worth it.
- Make sure you do your homework. A refinance can be a real blessing or it can be a significant burden.
- Some loans are better serviced than others. Deal with a reputable organization that will continue to service your loan. If they continue to sell loans and force you to a new service provide it can be a real pain.
- Sometimes it is wise to take a higher interest rate for a longer term loan so you do not strap yourself in the short term. What I mean is that it might be a good idea to take a 30 year fixed instead of a 15 year fixed, even though it may cost you a half point. You can always pay at the higher rate, but it gives you the flexibility to pay a lower payment if you had to do so.
I hope this helps. It might be difficult to take 5 talents and earn 5 more in our current interest market, but it might be possible to save 5 talents on your debt by wisely using the rates to your advantage. It is after all, the Lord’s money.
Feel free to post ideas and experiences. We could all learn from them whether good or bad.
