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Playing the mortgage game
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October 21, 1998: 9:58 a.m. ET
Experts say smart homeowners can reap rewards from record low rates
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NEW YORK (CNNfn) - Refinancing a home was never so sweet.
Thanks to the lowest mortgage rates in nearly 30 years, homeowners can consolidate debt, prepare for a recession, pay off car loans or even put money into a long-term investment.
"Money can go into a conservative mutual fund instead of a mortgage, " said Gary Altman, president of Capitol Mortgage Services in Atlanta, Ga.
The secret is in careful planning and how you crunch the numbers.
"When money is this cheap (to borrow), it really is to your advantage to lock in the lower rates," said Gerard Papetti, a certified financial planner and president of U.S. Financial Services in Fairfield, N.J.
Here's how it works.
Say you have a $200,000 home and a $100,000 mortgage at 8 percent over 30 years. Your monthly payment is $917.
If you refinance at 6.5 percent over the same time, but with a $150,000 mortgage, rather than $100,000, your monthly payment will be $948. After you pay fees, though, you'll walk away with a $46,000 check, Altman said.
You can take that $46,000 and put it in a conservative mutual fund, and since the U.S. stock market earns about 10 percent a year, you'll still come out ahead, Altman said.
If you don't want higher payments, here's another scenario, Altman said. Take the same $200,000 home with a $100,000 mortgage at 8 percent over 15 years. The monthly fee is $965.
If you refinance at 6.5 percent for the same amount over the same time, your monthly cost is $948 and you'll walk away with $20,000 to invest after fees.
Or, you can pay off $5,000 in debt and invest the rest, Altman said.
Papetti said you shouldn't plan on touching the money you invest for at least 10 years to make the refinancing worth the effort.
"As long as you don't need the money for anything else, if you can average 10, 11 percent in the stock market, you'll come out ahead," Papetti said.
And this only works for people who are disciplined about saving money. It won't do you any good if you spend the money you borrowed to invest in the market.
"If you're not a saver, I'd be very concerned you may spend that investment account," Papetti said.
Keep refinancing costs in mind, too, which vary from state to state. In some areas, obtaining a new loan will cost $3,000, while others only charge $1,000.
Not everybody is bullish about refinancing to invest, however. Guy Cecala, publisher of Inside Mortgage Finance Publications in Bethesda, Md., said the practice poses risks. Primarily, stock market returns aren't guaranteed, he said.
"The main goal in refinancing is lowering your debt and positioning yourself against a downturn in the economy," Cecala said. "I tend to be a little more bearish than a lot of people."
Of course, one advantage refinancing is that mortgage interest is tax-deductible. So if you consolidate your debt, you'll get that added tax benefit.
Likewise, if you refinance and pay off your car loan, it will be as if your car loan is tax-deductible, Cecala said.
Lastly, Lou Stanaslovich, president of Legend Financial Advisors in Pittsburgh, Penn., recommended people consider rolling a home equity loan into a mortgage.
Home equity loan rates haven't fallen as far as mortgage rates. The average rate nationally is 9.28 percent, according to Bank Rate Monitor.
Stanaslovich's most enthusiastic clients are those who refinance from 30 year- to 15 year-mortgages. In many cases, they have the same monthly payment, yet they're paying off the loan in half the time.
"This is tax savings," Stanaslovich said. "People love that."
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