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How Low Can Mortgages Go?

Aired June 18, 2003 - 13:15   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


MILES O'BRIEN, CNN ANCHOR: Since the first caveman did the first mortgage, these rates are historically low, right, Rhonda Schaffler? Is that right?
RHONDA SCHAFFLER, CNN SENIOR BUSINESS CORRESPONDENT: Well, not as low as in the caveman days, Miles.

O'BRIEN: OK.

SCHAFFLER: But...

O'BRIEN: So, should we refinance, you know, even if we have kind of recently? I mean, we're talking about some amazingly low rates here.

SCHAFFLER: Yes. Well, that's, of course, what keeps enticing people here. And let's get to the rate itself. Mortgage Bankers Association now saying 30-year rates fell below 5 percent last week. They're standing at 4.99 percent, and that is indeed the lowest since they began keeping records in 1990.

Now, we know that some people have refinanced their mortgages perhaps more than once, and if you're trying to figure out if you should do it again, you have to do the math. There's a basic rule of thumb for refinancing. The new rate must be about a point lower than the old rate. What you have to calculate, though, is how much it's going to cost in closing costs, and how much it's going to take you as far as years to recover that amount.

So, we did an example for you here based on $150,000 mortgage at just under 5 percent. You can see that you'd pay 804 a month. Now, if you look at that same price for a mortgage at 6.5 percent, it runs you 950 a month. If you refinance, that's about $150 savings per month, more than 1,700 a year. If you keep the loan for all 30 years, it's going to shave off $53,000 in interest payments.

Of course, if you live in one of those more expensive areas, you might not be able to get such a good rate. You have to sometimes get a jumbo mortgage. That is above $322,000. They carry a higher interest rate, but those rates, too, fluctuate when overall mortgage rates goes down. You also see a decrease in the jumbos -- Miles.

O'BRIEN: You've really got to read the fine print on this and make sure you understand all about those loan origination fees and points and all of that stuff.

SCHAFFLER: Right. O'BRIEN: And weigh that against that monthly savings.

Now, the one other thing that a lot of people I know are doing is with rates such as they are, they can afford a 15-year note, which is kind of appealing because you can really see the finish line there.

SCHAFFLER: That's right. If you perhaps buy a house late, you want to retire a little bit early, you are seeing this move into these shorter 15-year loans. No hard figures, by the way, on how many. But it potentially is a good idea. If you've already got several years into a 30-year mortgage, you don't get a lower monthly payment, but you really save some money when you look out over the total course of the loan.

Let's take that $150,000 loan again. Over 30 years with a mortgage at about 5 percent, you'll pay nearly $140,000 in interest. But if you take that loan out for 15 years, look at how much you cut your interest payments down to, 63,000. So, that's a fairly significant savings here, Miles. And that's why you're seeing some people decide, you know, I'll pay a little bit more extra every month to get my mortgage paid off a little bit sooner.

O'BRIEN: Yes, somebody told me once, correct me if I'm wrong, if you pay one extra payment a year, you can lower the term of your 30- year note to something like 20 years or something like that. I don't know if you've done the math on that.

SCHAFFLER: Yes, that's true. I mean, it depends on how much you have in your mortgage. But you also see people do that. If you do pay a payment against the principal, of course, in the end you'll see that...

O'BRIEN: Yes, make sure you earmark it for principal, that's important.

SCHAFFLER: Right, and you've got to do that, because if not, they'll just apply it the whole loan.

O'BRIEN: Yes.

SCHAFFLER: So, if you pay that payment on your principal, yes, because your principal has been reduced so you'll pay less in interest costs on that as well.

O'BRIEN: All right, what about new homebuyers? How do they fit into the mix here?

SCHAFFLER: Well, that's -- you know, we have told you for how long here that the economy is running better than it possibly could be, because of these consumers buying homes. We told you earlier in the week about a housing starts number telling us that people are still anticipating the housing market strength to continue. A lot of people who potentially could not afford to be in the housing market, thanks to these lower rates, are now, too, getting their little piece of the American dream.

O'BRIEN: Yes, I think there's -- it's softened up the rental market as a result. A lot of rentals are going vacant as a result.

SCHAFFLER: That's the downside. That's the downside, yes.

O'BRIEN: Yes, all right, Rhonda Schaffler, thank you very much for that little -- gosh, that was mortgage 101. I hope everybody was taking notes. That was good. I appreciate that. Good work.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.






Aired June 18, 2003 - 13:15   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MILES O'BRIEN, CNN ANCHOR: Since the first caveman did the first mortgage, these rates are historically low, right, Rhonda Schaffler? Is that right?
RHONDA SCHAFFLER, CNN SENIOR BUSINESS CORRESPONDENT: Well, not as low as in the caveman days, Miles.

O'BRIEN: OK.

SCHAFFLER: But...

O'BRIEN: So, should we refinance, you know, even if we have kind of recently? I mean, we're talking about some amazingly low rates here.

SCHAFFLER: Yes. Well, that's, of course, what keeps enticing people here. And let's get to the rate itself. Mortgage Bankers Association now saying 30-year rates fell below 5 percent last week. They're standing at 4.99 percent, and that is indeed the lowest since they began keeping records in 1990.

Now, we know that some people have refinanced their mortgages perhaps more than once, and if you're trying to figure out if you should do it again, you have to do the math. There's a basic rule of thumb for refinancing. The new rate must be about a point lower than the old rate. What you have to calculate, though, is how much it's going to cost in closing costs, and how much it's going to take you as far as years to recover that amount.

So, we did an example for you here based on $150,000 mortgage at just under 5 percent. You can see that you'd pay 804 a month. Now, if you look at that same price for a mortgage at 6.5 percent, it runs you 950 a month. If you refinance, that's about $150 savings per month, more than 1,700 a year. If you keep the loan for all 30 years, it's going to shave off $53,000 in interest payments.

Of course, if you live in one of those more expensive areas, you might not be able to get such a good rate. You have to sometimes get a jumbo mortgage. That is above $322,000. They carry a higher interest rate, but those rates, too, fluctuate when overall mortgage rates goes down. You also see a decrease in the jumbos -- Miles.

O'BRIEN: You've really got to read the fine print on this and make sure you understand all about those loan origination fees and points and all of that stuff.

SCHAFFLER: Right. O'BRIEN: And weigh that against that monthly savings.

Now, the one other thing that a lot of people I know are doing is with rates such as they are, they can afford a 15-year note, which is kind of appealing because you can really see the finish line there.

SCHAFFLER: That's right. If you perhaps buy a house late, you want to retire a little bit early, you are seeing this move into these shorter 15-year loans. No hard figures, by the way, on how many. But it potentially is a good idea. If you've already got several years into a 30-year mortgage, you don't get a lower monthly payment, but you really save some money when you look out over the total course of the loan.

Let's take that $150,000 loan again. Over 30 years with a mortgage at about 5 percent, you'll pay nearly $140,000 in interest. But if you take that loan out for 15 years, look at how much you cut your interest payments down to, 63,000. So, that's a fairly significant savings here, Miles. And that's why you're seeing some people decide, you know, I'll pay a little bit more extra every month to get my mortgage paid off a little bit sooner.

O'BRIEN: Yes, somebody told me once, correct me if I'm wrong, if you pay one extra payment a year, you can lower the term of your 30- year note to something like 20 years or something like that. I don't know if you've done the math on that.

SCHAFFLER: Yes, that's true. I mean, it depends on how much you have in your mortgage. But you also see people do that. If you do pay a payment against the principal, of course, in the end you'll see that...

O'BRIEN: Yes, make sure you earmark it for principal, that's important.

SCHAFFLER: Right, and you've got to do that, because if not, they'll just apply it the whole loan.

O'BRIEN: Yes.

SCHAFFLER: So, if you pay that payment on your principal, yes, because your principal has been reduced so you'll pay less in interest costs on that as well.

O'BRIEN: All right, what about new homebuyers? How do they fit into the mix here?

SCHAFFLER: Well, that's -- you know, we have told you for how long here that the economy is running better than it possibly could be, because of these consumers buying homes. We told you earlier in the week about a housing starts number telling us that people are still anticipating the housing market strength to continue. A lot of people who potentially could not afford to be in the housing market, thanks to these lower rates, are now, too, getting their little piece of the American dream.

O'BRIEN: Yes, I think there's -- it's softened up the rental market as a result. A lot of rentals are going vacant as a result.

SCHAFFLER: That's the downside. That's the downside, yes.

O'BRIEN: Yes, all right, Rhonda Schaffler, thank you very much for that little -- gosh, that was mortgage 101. I hope everybody was taking notes. That was good. I appreciate that. Good work.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com.