Times have changed and mortgage interest rates are lower now than ever before. Even if you have refinanced your home in the last few years, it might be time to do it again. Refinancing your mortgage can save you a lot of hard-earned money - when it makes sense.
According the National Bureau of Economic Research, current mortgage interest rates are the lowest they have been in over 50-years. The last time rates were this low was in April of 1956.
Refinancing is the process of paying off an existing loan with a new loan, and using your same property as collateral. Because the interest rate on the new mortgage is less than the old one, the loan costs less and you save money over the term of the loan.
The reason most people choose to refinance their home is because the lower interest rate decreases their monthly mortgage payment– freeing up money for other expenses. Every percentage point makes a difference. For example, if you refinanced a $200,000, 6.5% percent interest loan to a loan with 4.5% interest, you’d lower your monthly payment by about $260.
Another reason to refinance is to pay the house off faster, which is done by switching a long-term loan for one with a shorter term. In this scenario, your mortgage payment could be higher, but you’d pay much less in interest over the life of the loan while building equity much faster.
Another option for some homeowners is a cash-out refinance. With this type of loan you refinance your current mortgage plus take out additional cash from the home’s equity. Usually the cost to borrow the additional funds from the new mortgage is less than other types of loans and the monthly payments are almost always less.
Why not refinance today? Well, there are costs involved and refinancing does not always make sense. You have to weigh the savings in interest against the fees associated with refinancing. A new loan means you will have to pay most of the same costs you paid when you got the existing mortgage. These fees may include points, appraisals, attorney’s fees, settlement costs (such as fees for the loan application, title search, appraisal, loan origination, and credit reports), recording fees or transfer taxes, and sometimes a pre-penalty penalty. All totaled, these costs can be high, and most lenders require a portion of them be paid at the time of application.
Points are confusing to most borrowers. The largest expense for a refinance is usually the points. One point equals one percent of a loan, and to get you the lowest rate, lenders may charge several points. The total cost can run between 2 to even as high as 6 percent of the new mortgage amount. For example, a $100,000 mortgage, the lender might charge between $2,000 and $6,000 in points.
Some lenders do offer mortgage loans with zero points, but the loan will typically have a higher interest rate. Several factors determine if a borrower will qualify for these programs. Credit scores and the amount of the property’s value that is being borrowed are 2 of the largest factors.
To know what combination of rate and points is best for you, compare the amount you can pay up front with the amount you can pay monthly. The less time you keep the loan, the more expensive refinancing costs become. For example, if your refinancing costs are $3,000 and your payments are $125 lower each month, it will take you 24 months just to break even.
So is it time to refinance your mortgage? If you will come out ahead financially, then it is definitely worth considering. Refinancing is not the magic answer for everyone.
Visit a Truliant Member Financial Center or call the Member Contact Center for information on Truliant’s mortgage loan programs. We offer a variety of loan options to choose from including fixed rate mortgages and adjustable rate mortgages. We offer easy to understand explanations of each program on our mortgage website.
