Refinancing home can pay off now, later

Your house is an investment. But you needn’t wait until you sell it to realize some gains. You can save some money through your house by refinancing your mortgage.

The benchmark 30-year fixed mortgage rate has been at record low levels for quite some time now, with many experts expecting it to rise over the next few years. Still, rates remain much lower than historical averages, and if you haven’t refinanced yet, it may not be too late for you. You owe it to yourself to consider whether refinancing makes sense right now.

Refinancing is when you take out a new mortgage on your home at a lower interest rate, typically decreasing the amount of your payments. You may also opt for a shorter-term mortgage, which may offer somewhat higher payments.

You first need to assess the myriad mortgage costs involved, such as the origination fee, discount points, the appraisal, the credit report, processing, title insurance and the escrow fee. Next, check out available loans and interest rates (made easy at Web sites such as www.fool.com/rates and www.bankrate.com). Consider what “points,” if any, you might have to pay. A point is equal to 1 percent of the value of your loan. They’re paid up front when you close the loan.

If you can get a new mortgage at a rate 1 (or sometimes 1/2) percentage point lower than your current mortgage, you may reap enormous interest savings over 15 to 30 years, depending on how much you borrow. For example, $100,000 borrowed at 7 percent instead of 8 percent for 30 years will save about $25,000 over the length of the loan. If you put the $69 a month you save into the stock market, earning 11 percent per year, in 30 years you’d have more than $190,000.

In some refinancings, you can actually increase the amount of your loan by taking out extra funds – perhaps to pay down credit card debt or make home improvements. Be careful using this “cash-out” tactic, though. Your valuable home equity will be taking a hit, and cash-out interest rates can be higher.

Learn more at www.quicken.com/ mortgage/refinance and www.fool.com/homecenter.

Ask the Fool

Q: If I can’t make a deductible IRA contribution, is it worthwhile to make a non-deductible IRA contribution to a traditional IRA account, instead of just putting it straight into a regular brokerage account? – Louie, Tempe, Ariz.

A: One good reason to do it would be for the tax-free compounding of the money inside the IRA. You don’t pay any capital gains taxes when you sell securities in the IRA, nor do you pay income taxes on any dividends. Over decades, this can be very powerful. Of course, IRA accounts come with some strings attached, in the form of withdrawal rules and possible penalties. And you do pay taxes on withdrawals.

The longer your time horizon, the more sense a non-deductible traditional IRA makes. With the lack of taxes on sales of stock in the account, it’ll compound faster. This option also makes more sense the more actively you plan to buy and sell in the account, especially if much of your trading is short-term.

Assuming that you qualify for it, though, a Roth IRA is superior to a non-deductible traditional IRA. If you follow the rules for a Roth IRA, the distributions down the road will be completely tax-free. Plus, using a Roth IRA allows for easier access to prior contributions without taxes or penalties.

Q: How do no-load funds make any profits? – C.I., Salinas, Calif.

A: Well, a fund may sport no load, which is essentially a sales commission, but it probably still charges its shareholders expense fees, management fees and marketing (12b-1) fees. These add up and reduce the returns the fund offers you, so pay attention to all the fees your funds are charging.

Learn more about funds at www.fool.com/mutualfunds/ mutualfunds.htm and at www.morningstar.com.

The Motley Fool Take

Judging by its recent second-quarter earnings release, no one told Home Depot (NYSE: HD) consumers they were supposed to be less confident. While the summer’s financial headlines were full of dire sales warnings, do-it-yourselfers didn’t seem to have had any trouble opening up their wallets. Revenues had a brisk rise at Lowe’s (NYSE: LOW), too.

The average Home Depot customer spent 8.2 percent more per purchase – just more than $4 – to help push sales up 4.8 percent. The big orange retailer notched sales of $20 billion for the quarter, 11 percent better than last year. Earnings per share shot up 25 percent.

Gross profit margins advanced by 2.2 percent. Multiply by $20 billion, and you get an idea of what that can do for the bottom line. Mix in generous stock buybacks of several billion dollars, and you have a recipe for reliable investor rewards.

If you need to pick nits, well … Selling, general and administrative (“SG&A”) costs popped up 1.4 percent as a portion of revenues. Trimmer operations would have made things even sweeter.

Shares have recently been trading with a price-to-earnings (P/E) ratio in the high teens. That’s not a screaming bargain, but given the firm’s solid consistency and opportunities for growth in Mexico and China, investors may want to stock up a bit, perhaps especially during occasional market discounts.