# Does a 60% annual rate of return sound good to you?

By
Mortgage and Lending with Morgan Financial

Everyone knows that when you refinance your current mortgage into a new one you can benefit in better terms, better interest rate, better payment, and you may skip a month of your mortgage payment, however, most people do not look at the opportunity cost of the money that it costs to do the refinance.  What rate of return is your money getting right now as it sits in the bank? A half a percent?  A whole percent?  I doubt it is doing much better than that.

What if I told you that you could receive a guaranteed rate of return on your money of over 60% per year?  Would that interest you at all?  Of course it would; you are a rational, financially conscious human being.  Well, let me give you a scenario where that is not only true, but highly likely in today's mortgage interest rate environment:

Let's say that you have a mortgage of \$300,000 at an interest rate of 6.25%.  Your monthly principle and interest payment would be \$1847.  If you were able to take advantage of today's interest rates, and refinance the \$300,000 balance into a 4.75%* interest rate, you would then lessen your monthly payment to \$1564 per month.  That is a monthly savings of \$283, and a yearly savings of \$3396.

As we all know, there is a cost to refinance; these costs are called closing costs.  You can either roll the closing costs into the loan, or you can pay them out of your pocket.  If the closing costs were around \$5500, and you were saving \$3396 per year because of the reduced payment, then that "investment" of \$5500 will get a 61% annual rate of return, for as long as you have that loan.  If you had the loan 10 years, then you would have saved over \$33,960 and achieved over a 600% rate of return on your investment.  How much would \$5500 earn you at your bank right now?

While this scenario may not be exactly like the one that you are currently in, think about this:  what is my money doing for me right now?  Can I use that money that is gaining no interest in the bank for something that will give me a better rate of return with little or no risk?  Even if you have little to no equity in your home, you still may be eligible to refinance your home into a better interest rate.  There are several government sponsored programs that you may be eligible to take advantage of and put your money to work for you.  Please contact me today, before these interest rates and programs are gone.

*Author of this article makes no claims and is not advertising this rate.  This is a theoretical situation.   For current interest rates and to have a professional go over your options with you, please contact Joe Harris at joe@joeknowsmortgages.com

Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Eighteen Years Experience in Brevard County

For folks with high credit scores this seems like a good reasonable thing to do. Those with less than stellar credit would realize a bit less so it may not make sense for them I would guess.

Nov 30, 2009 03:44 AM
Joe Harris
Morgan Financial - Melbourne, FL

You are correct.  There are "pricing add on's"  for credit scores below 720.  While lesser credit scores will have an effect on pricing, the loan still may make sense.  I always do a cost benifit analysis for my clients, present the facts, and let the client make the decision based on the facts.

Nov 30, 2009 11:41 AM