Historic Low Mortgage Rates and You

This writer’s customary commentary on green building and sustainable site design and construction is being pre-empted by the “green”, as in $$$, that may be available to you as the result of recent record low mortgage rates. These record-setting rates now are as low as 4.25% for 30-year, fixed rate financing, below 4% for 15-year fixed rate mortgages and as low as 3.6% for an adjustable rate mortgage. And while financial analysts and commentators have reported this news, none that I have seen have “connected the dots” to explain the significance of this temporary gift from the financial markets for anyone considering refinancing an existing home or purchasing another home.


Historically and as a rule of thumb, re-financing to save interest expense over the remaining term of the loan generally has made sense if the new mortgage rate is ½ percent or more lower than the mortgage rate being replaced. The ½ percent difference is the threshold that typically offsets the refinancing transaction costs over the first several years of the new loan. The interest savings after that point are all gain to you.

This rule of thumb, though, doesn’t answer the specific question, “Should I refinance or buy a new home now?”. The answer to that question is, “It depends”. It depends on your credit worthiness (after all, terms of credit are considerably more stringent today than 3-4 years ago) and whether there is sufficient equity in your present home, if you’re refinancing, or cash resources available to you, if you’re buying another home, to satisfy the equity requirements of your new lender. If your answer to both financing pre-conditions is “yes”, you should waste no time in acting on your desire to refinance an existing home or purchase a new home.

The potential financial significance to you from acting on these unprecedented interest rates can be seen in contrasting your financial position if you had qualified for a 30-year, 4.75% fixed rate mortgage three months ago and also received the $6,500 tax credit (now expired) for buying a new home versus where you would be financially simply with a ½ percent lower interest rate of 4.25%.

For purposes of this example, a net present value analysis, assuming an opportunity cost for invested funds of 4.75%, is used for comparison purposes to state in current dollar value the net result of future incremental interest expense costs or savings.

I’ve chosen $200,000 and $390,000, 30-year, fixed rate mortgage amounts, respectively, for contrasting the two mortgage rate scenarios. For a $200,000 loan and the 4.25% interest expense you will be better off, in today’s dollars, by $7,000 after 10 years and by $20,600 after 30 years as compared to having received the now expired $6,500 tax credit and a mortgage loan of 4.75%..

For a mortgage loan of $390,000 your incremental, current dollar gain over 10 years would be $15,500 and $37,700 over 30 years, in favor of the lower interest rate mortgage when compared against the aforesaid tax credit and a 4.75% mortgage interest rate.

Bear in mind also that another benefit to low interest rates is that they enable a borrower to use the same amount of funds available for payment of principal and interest to support a larger loan amount.

What is important to recognize is that the record low mortgage rate opportunity is an offer that is only valid “as long as the market says it is”, which means that it could expire any time during the coming weeks or months. And, in that circumstance the ones who reap the rewards are those who understand how much can be gained by such low rates and who make loan application for a refinancing or new home purchase and lock in an advantageous interest rate before the market says, “offer expired”.

While “opportunity” typically does not announce its arrival and call to action by shouting, today’s record low interest rates appear to be an exception to the rule.