President Obama's Mortgage Dilemma

Kiplinger

Poor President Obama. During his interview with Zillow on August 7 he talked up his administration's efforts to help homeowners recover from the Great Recession -- in particular by refinancing to take advantage of historically low mortgage interest rates and the reduced monthly payments they would deliver. He even got personal, saying he and First Lady Michelle Obama could save some money if they refinanced their Hyde Park home in Chicago.

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But, alas, the leader of the free world has had to pass up the opportunity to save. "When you're President," he explained, "you have to be a little careful about these transactions."

Obama didn't offer any details, so we decided to try to figure out what his predicament (if you can call the presidency that) is costing the First Family.

Thanks to publicly available information and the President's tax return we know that the Obamas paid about $45,000 in mortgage interest in 2012 and that his mortgage interest rate is 5.625%.

Based on these data points, we made an educated guess that the Obamas borrowed about $900,000 when they bought their home in 2005, and that they make monthly payments of about $5,150. Into the eighth year of the 30-year loan, we assume the couple still owes about $800,000.

Could refinancing make sense? Absolutely!

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If our guesstimates are reasonably accurate, let's say the President could refinance the $800,000 left on his mortgage at 4.11%. On a 30-year loan, that would cut the monthly payment to $3,857, about $1,290 less than our assumed payment on his current loan. That's more than a 25% savings. (The 4.11% rate is the best we could find on Bankrate.com today for a jumbo, 30-year fixed mortgage for someone with a pristine credit record -- which we assume the President has.)

The lower rate means the Obamas would pay less interest (just $29,780 in the first year of a new loan compared with $45,000 last year). And thanks to the tax increase on top earners that the President pushed through, the federal government would subsidize a bigger share of that expense. Deducting the interest in the new 39.6% bracket would mean that the government would effectively pick up almost 40% of the cost through the mortgage interest deduction.

But apparently the President worries that refinancing to the low rates he encourages others to take advantage of might somehow trigger a political backlash. Maybe critics would complain that he got an especially sweet deal just because he happens to be the President of the United States.

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All Is Not Lost

But don't give up, Mr. President. There is a silver lining to a high mortgage rate: The superior payback for speeding up the payoff.

If the Obamas have some extra cash, they should consider paying ahead on their mortgage. Doing so is the equivalent or investing -- risk-free -- at a rate equivalent to the rate on the loan. And 5.625% is nothing to sneeze at these days. It's more than double the 2.6% yield from ten-year Treasuries.

If the potential value of refinancing shown in the example above got your attention -- and if you aren't constrained like Mr. Obama -- see our advice on how to take advantage of today's rates. Or, if you're stuck in a higher-rate mortgage, consider the advantages of prepaying on the loan.

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