President Loses Out on Best Refinance Rates

Every year, the White House publishes the sitting President's and Vice President's financial disclosure reports. May 15, 2013, saw the release of 2012's. Unsurprisingly, The Wall Street Journal was all over these, and its reporters picked up on an interesting fact: Mr. Obama is still paying a whopping 5.625 percent on his Chicago home's 2005 mortgage.

Does the President Have No Choice?

Financial disclosure reports don't contain actual figures, but instead indicate where an official's income and expenditure fall. So the President's income from book royalties in 2012 could have been anything between $250,003 and $2.5 million. Add to either of those his $400,000 presidential salary, and you might assume the First Lady's liking for Target stores has more to do with taste -- or politics -- than need.

So it seems highly unlikely that it's Mr. Obama's credit score that's preventing him from accessing better refinance rates, if only because his political opponents would almost certainly have leaked such a fact, were it to be true -- or, indeed, were it capable of clearing even the exceptionally low bar that some of his detractors have set for believing almost anything negative about him.

Obama Mortgage Loan Underwater?

Okay, if its not a credit issue, might it be that Mr. Obama's home loan is underwater, meaning that his currently outstanding mortgage debt is higher than the value of his home? Again that's unlikely. Yet another search shows that prices for that house have rarely dipped below the $1.65 million Mr. Obama paid, and even then by less than 10 percent. Given that he discloses a home loan of between $500,000 and $1 million, negative equity has almost certainly not been an issue.

Why Refinance, Mr. President?

But why should the Obamas refinance? Well, his motivations would be the same as yours: to save money.

And how much could he save? We can't be sure, because we don't know the exact size of his mortgage, but let's assume it's precisely in the middle of the disclosure report's preset band: $750,000. That's what the Journal did, and it calculated the President is paying roughly $900 a month more than he needs to.

Refinance for 15 Years?

But, at least from this distance, the Obamas look to be cash rich, and homeowners in that situation often have better options. For example, they could refinance with a 15-year fixed-rate mortgage (FRM). At the time of writing, the latest figures from Freddie Mac were for weekending May 16, 2013, and 30-year fixed mortgage rates then averaged 3.51 percent with cost of 0.7 point. But those for a 15-year FRM averaged just 2.69 percent with the same cost.

That's a big saving, made even bigger by the shorter term: everyone knows you pay less total interest if you're borrowing money for a briefer period. So, using a loan refinance calculator, how much could the President save with a 15-year refinance? His new monthly mortgage payment (principal and interest) would be $5,068, compared with his existing payment of $4,317, so he'd actually be worse off month-by month. But over the lifetime of his home loan, the saving would be huge, and we are working on the assumption that he's cash rich.

With his current mortgage, he stands to pay a total of $1,554,120 over the 30-year term. Were he now to refinance for another 30 years, his payments on his new loan would total $1,213,920 ($3,372 a month). But were he now to opt for a 15-year loan, his total payments would be $912,240 -- and he'd be free of mortgage debt in 2028.

Or an ARM?

Having a retired president in residence may bring prestige to a suburb, but it can also come with downsides for neighbors. The Secret Service isn't noted for being unobtrusive. So perhaps the Obamas might be thinking of moving to somewhere more remote, perhaps in five years' time.

If that's the case, they could consider a 5/1-year hybrid adjustable-rate mortgage (ARM). For those first five years of the loan, they'd be paying even less than for a 15-year FRM: just 2.62 percent (with  0.5 point), according to those Freddie Mac figures. However, there's a risk: the rate will float to market levels in 2018, and, if they end up staying longer than planned, there's a good chance their ARM could become expensive.

You're Not President... Yet

The real reason Mr. Obama hasn't refinanced is probably his job. A good president doesn't generally have the spare time it takes to manage a refinance process. And, were he to make that time, his opponents would probably attack him for losing focus on national issues.

So there’s a good chance he might stick with his current high rate. But you're not president, at least for now. And if you're paying more than you need, you have to ask yourself: What's your excuse?

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