Mortgage Rates Fall to Record Lows.
Average mortgage interest rates just hit their lowest level since 1971 (read more in the news, here), and if you are a homeowner, this is a really good time to explore refinancing. And I do mean “explore.”
Just because rates have dropped doesn’t necessarily mean that it is wise for everyone to refinance immediately. Refinancing involves applying for a new loan which will be used to pay off the old loan. Remember that mile-high stack of mortgage paper work? You’ll have to go through that process all over again, (but the extra effort could really be worth it in savings).
Is Refinancing Your Home Right For You?
There are lots of good reasons to refinance your mortgage including a lower interest rate, a shortened mortgage term so you can build equity and get out of debt faster, lower monthly payments, or switching from an adjustable rate to a fixed-rate mortgage.
Before you invest too much time in the refinance process, make sure you can say “yes” to the following 2 questions (the basic refinance rules of thumb):
- Is the new refinance interest rate at least 1 percent lower than your existing mortgage interest rate?
- Do I plan to own my home until I break even on the refinance costs?
If you answered “no” to either of these questions, it might not make sense for you to refinance at this time, as loan costs could exceed any potential interest savings. Keep reading, if you said “yes” to both questions or if you don’t know the answer (we’ll help you figure that out below).
6 Easy Steps To Determine If A Refinance Will Save You Money
If you can say yes to the above questions, you still have a little loan shopping and comparison homework to do in order to decide whether a refinance is a wise option.
- Find out if your current mortgage has prepayment penalties. Although it is uncommon, some mortgages do charge a prepayment penalty. If this is true of your mortgage, determine how much you will be charged if you pay off your mortgage early.
- Shop for the best refinance deal. We recommend that you only look at fixed interest loan rates (go here to learn more) from reputable loan providers. Also compare your total closing costs and refinance fees among potential lenders, costs like: points, survey fees, appraisal fees, attorney fees, mortgage prepayment penalties and more (read the list of potential fees here). Ask each lender to give a complete list and total cost of fees in writing so that you can make a fair comparison.
- Learn what the new monthly mortgage payment will be. Each bank or mortgage company should give you, in writing, the new interest rate and monthly mortgage payment, based on at least two options:
- Add the closing costs and refinance fees to the remaining balance of the home (this is called “rolling costs into the mortgage”), AND
- Pay the refinancing fees and closing costs out-of-pocket and in cash. If you can swing it, this is typically the better financial option, providing a higher amount of long-term savings.
- Compare the offers and their potential savings. Use the refinance calculator (here) to compare the interest savings and refinance costs for each lender option and figure out which gives you the most favorable overall cost savings. If you’ll have a prepayment penalty on your current mortgage (Step #1, above), determine what the penalty would be if you refinance, and add that amount to your closing costs when you make your comparisons.
- Calculate your break-even point. For each loan scenario, write down the number of “months for interest savings to offset closing costs” (9th box down in the refinance calculator). This is also known as your break-even point.
- Analyze your break-even point. Estimate the number of months you expect to own your home and compare it to the break-even points calculated in steps #4 & #5 of each loan scenario. If the expected number of months that you’ll own your home is greater than the break-even point number of months, then refinancing will likely offer you long-term cost savings.
An important side note on taking cash out: You might figure out that this is the right time for you to refinance. Depending on the amount of equity you have already invested in your home, your loan provider might give you the option to get cash back and take out a bigger loan. While this might be tempting, we strongly recommend that you avoid this option if possible. It will likely cost you more money in the long run, could possibly wipe out any potential savings you make from the refinance, and might extend the amount of time until you can be debt and mortgage free. This option benefits the lender (who makes more money off the larger loan), not you. Just say “no” to this option!!
Are you planning to refinance your home? Do you have any words of wisdom you can share from your home refinance experience? We’d love to hear about it (please leave a note in the comments section)!
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