There are many things to consider when refinancing: interest rate, closing costs, terms, value of your home.
How do you know when the right time is? The rule of thumb is that you should refinance whenever you can lower your interest rate by 1% or more.
For Example: A $150,000 30 year mortgage at 4.5% interest would require a payment of $760.03. The cumulative interest paid over the life of the mortgage would be $123,611. That is almost the cost of another home.
That same 30 year mortgage, if refinanced at 3.5% (current rate) would require a payment of $673.57 (an $86.46/mo savings) and have a cumulative interest of $92,485 (a $31,126 savings.) If you paid the same payment of $760.03, you would pay off your mortgage 5 ½ years sooner and save another $18,800 in interest.
Wow! That is $31,100-$49,900 in savings just by doing some paperwork. Obviously, there are many more options, like 10, 15 and 20 year mortgages, 5, 7 and 10 year balloons, etc. It is typical that the shorter the repayment period, the lower the interest rate, which means more savings. You will want to run the numbers to see what you can save and what is the best fit for you. There are many mortgage calculators on-line, call us or talk to your current mortgage loan officer.
But what about closing costs? If you stay with the same lender sometimes there are smaller closing costs, but not always, it’s okay to shop for the best rate. You may want to try to pay closing costs up front if you can. If you roll them into your mortgage, your mortgage may be higher and some of the savings lost, but it’s not usually enough to make a big difference. If we added $2,000 in closing costs to the mortgage, the payment would be $682.55 (only a $77.48/mo savings) and $29,893 saved in interest.
If you are in a situation where your home value has declined, now may not be the right time for you. The lender will require that your mortgage be 80% or less of the value of your home. If your home will not appraise at a high enough value, you may not be able to refinance, even at a higher rate. You may have to wait it out. As the economy continues to grow, so will your home’s value. It may be worth spending the approximately $350 appraisal fee to determine if you can save thousands in interest. Your loan officer may be able to determine if you qualify for governmental programs that allow for lowering your monthly payment or refinancing even if your home does not appraise at 80% or more of your mortgage.
Robert F. Murray & Company CPAs, P.C. making your money work harder for you.