WHEN IS IT RIGHT TO REFINANCE?Written by Tim McMahon
With "everyone" talking about historically low mortgage rates you are ready to decide if it "pays" to refinance. The "rule of thumb" supplied by mortgage companies is that if you can reduce your interest rate by 1% it is usually profitable. But there is more to it than that. Like how long are you planning on staying in house? Realistically, first thing you need to determine is what rates do you qualify for and what are other costs (like points and closing costs). When refinancing it is common to roll additional costs and fees back into mortgage so there are no "out of pocket" costs. But this allows Bank or other mortgage holder to charge you interest on these fees. At current low interest rates and if you choose a short time period for your mortgage additional interest will be relatively small. But even at these low rates, if you have a 30 year mortgage, interest will end up doubling amount of fees over 30 year life of loan. Assume you took a 30 year, $115,000 First mortgage on a house 5 years ago. The interest rate at time was 7.5% and your principal and interest payment was $765.10 per month. (If $765.10 sounds low to you, remember your "actual payment" may also include mortgage insurance, taxes and home owners insurance.) After paying $765.10 per month or $9181.20/year for 5 years you have spent a total of $45,906. Plus, you still owe about $108,000 on your $115,000 mortgage and you still have 25 more years to go! Not much of your payment is going toward principal! So sooner you can get out from under better. Recently interest rates have fallen to around 5% so you consider refinancing. Assuming Closing Costs, fees and expenses are about $3,000. you will have to "borrow" $111,000. to pay off your $108,000. loan (or come up with $3,000.) from savings. If you decide to refinance additional costs for another 30 years... your loan amount would be $111,000. and you would be almost back to where you started 5 years ago... but your payment would drop to $595.87 for a monthly savings of $169.23 Although it might be nice to have an additional $169.23 to spend each month, question is what will you do with money? Go out to eat more, buy more toys? Invest it in your retirement fund? Or just "blow it"? If you just "blow it"... all you have accomplished is that you are in debt to bank for an additional 5 years. Not a happy prospect... What if you set mortgage term to 25 years? In that case, your payment would be $648.89 saving you $116.21 per month. So for an additional $53.02 per month your mortgage term remained same. Personally, I think that is a better solution. At least you aren't pushing your retirement out an additional 5 years while you continue paying your mortgage. Remember, original question was... Is it worth it to refinance and pay additional $3000. or just keep paying on old mortgage? Keep in mind, as soon as you sign papers equity you have in your house drops by $3000! Assuming you chose 25 year mortgage (with $116.21/mo savings) it will take you 25.8 months to break even ($3000/$116.21) because at that point you will have saved $3000. it cost you to refinance. So if you intend to stay in your house 3 or more years it would pay for you to refinance.
| | No Load Mutual Funds or Exchange Traded Funds (ETFs)?Written by Ulli G. Niemann
If you are fed up with early redemption charges and ever increasing mutual fund management fees on top of bad-performing fund managers, read on. There is a quiet revolution going on in no-load mutual fund industry and you, individual investor, may benefit from it greatly.I am referring to Exchange Traded Funds (ETFs), which have been around for years, but have grown tremendously since their inception. There are currently over 100 choices with around $10 billion in assets. In a nutshell, an ETF is a specific kind of no-load mutual fund that you might consider to be a basket of stocks. ETFs are diversified like mutual funds, only they trade like stocks. They are cheap to trade (as low as $8.00) and don’t hit you with any short-term redemption fees. And they offer investing opportunities across board. ETFs track every index under sun including S&P 500, Nasdaq 100, The Russell 2000 and many others. Available through any discount broker, they basically fall into one of three categories: broad-based U.S. indexes, sectors and international. The have esoteric names such as iShares, StreetTracks, HOLDRs and SPYDRs. The difference is in index they are tracking and company marketing them. You will see big name companies offering them, like American Stock Exchange, Barclay’s Global Investors, Vanguard, and State Street Global Investors. In my newsletter I track currently most appropriate ETFs for you to consider. For more detailed information you can visit these web sites: www.nasdaq.com www.amex.com www.ishares.com In addition to inexpensive trades and no short-term redemption fees, how else can ETFs save you money vs. no load mutual funds? One way is on their annual management fees. That fee for ETFs is in area of 0.45% vs. 1.5% on average for no load mutual funds. The fees charged by discount broker are so low they almost can be disregarded, usually less than 0.1% of transaction. For example, I have used ETFs for some managed account clients during my last Buy cycle, which started on 4/29/03, and paid $27 for a $28,000 order — and that wasn't even with cheapest discount broker.
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