With the recent volatility in mortgage rates, you might be wondering whether or not it might be a good time to consider refinancing your home. If this advice feels a bit deja-vu, you are probably right. Mortgage rates have had just enough volatility these past few years to have created several opportunities for homeowners to refinance and save money on their monthly mortgage payments.
If you currently have a mortgage rate above 4.0% we highly encourage you to read on. Then, take a moment to see if you could benefit financially by refinancing your home.
A Quick Mortgage Refinancing Example
Of course, every situation is different, but the best way to demonstrate why refinancing your home makes good financial sense is to walk through a simple illustration.
Let’s assume that you purchased your home a few years ago for $300,000 and at the time you secured a mortgage rate at 4.50%. We will assume you made a 10% downpayment at the time of purchase which means you borrowed $270,000. If you secured a 30-year mortgage your monthly principal and interest payment would be $1,368. (Taxes and insurance on top of that).
Today, given where rates are, you might be able to secure a new 30-year mortgage rate of 3.50% by refinancing. This new lower rate means that your new monthly mortgage payment will drop to $1,167, a $200 per month savings!
Alternatively, if you are feeling really financially motivated and have room in your budget, you could consider refinancing to a new 15-year mortgage. Although your monthly payment will likely increase – this is where the massive interest savings kicks in. Back to our example above. Today, you might be able to secure a 15-year rate as low as 3.125%. In this case your new monthly payment would increase from $1,368 to $1,811 (an increase of $443 per month) BUT…hold on to your hats, over the life of the 2 loans, the 15 year mortgage with the lower interest rate would save you nearly $150,000 in interest cost over the old 30 year loan!
In reality, most people do not stay in the same house long enough to see it too full payoff. Nevertheless, by lowering your interest rate (either with a better 30-year rate or a much lower 15-year rate) more of your monthly payment is going to paying down the principal of your loan instead of the interest. In other words, more of your money is going into your house equity instead of the pocketbook of the bank that holds your loan!
Refinancing Rule of Thumb: 2 Years AND No Junk Fees
At Blooom, we generally advise our clients to look into refinancing their mortgage if they are planning to stay in the home for at least the next 2 years AND if they use a lender that does not layer in “junk fees.” There are lenders out there that will refinance your mortgage for next to no fees – but you might need to shop around a bit. Some of the fees that you need to be on the lookout for are lender fees, origination fees or underwriting fees. It is a very competitive mortgage market which is good for you, the homeowner, and don’t be afraid to negotiate. In many cases, these extra fees can be negotiated away entirely. One final word of advice, the big national mortgage companies that do the most TV advertising may not offer the best deals to refinance. It costs a lot to advertise all over TV and those expenses need to be recouped somehow!
A Summary in Refinancing Your Home
If your current mortgage rate is above 4.0% we would consider looking into your mortgage refinancing options. Rates are lower than they have been in previous years, which could mean big savings for you and your family.
Blooom members know, we are here to offer unbiased, un-conflicted advice on all things important to you regarding your money. No, we do not make any revenue by you refinancing your mortgage. (But, good for you for asking!) We are always on the lookout for smart ways to save money and refinancing your home may be just the thing to do.
Feel free to reach out to us if you have questions specific to your own mortgage situation, we would be happy to help.
The information is provided for discussion purposes only and should not be considered as advice for your investments. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.
Published on October 4, 2019