It’s no secret the housing market is hot and low rates are part of what’s fueling the fire. According to Bankrate, the average 30-year fixed mortgage rate is currently at 3.33%, while the average 30-year fixed mortgage refinance rate is just behind that at 3.35%. Before rushing into a new loan, here are a few points to consider:
Refinancing to secure a lower interest rate.
Experts tend to state that a good rule of thumb would be reducing your rate by 1-2%. Reducing your rate will not only allow you to save money, but it also helps build equity in your home at a faster rate. For example, a 30-year fixed mortgage with an interest rate of 4.5% on a $100,000 loan, has a principal and interest payment of $507 per month. By refinancing at 3%, it would drop the monthly payment down to $422 per month. For those who may be tight on their monthly budget, refinancing to a longer term loan to reduce monthly payments could also make sense.
Refinancing to shorten the loan’s term.
When interest rates fall, it can give borrowers an opportunity to shorten the length of the loan, while keeping a similar monthly payment. As a result, the borrower would save on overall interest payments over the life of the loan.
The costs of refinancing.
Some lenders will charge additional fees for underwriting, credit checks, and appraisal fees. The biggest additional cost will come from closing fees that typically range anywhere from 3-4% of the loan value. These costs may vary depending on each household’s unique circumstances but may include some of these other fees as well. Points effectively increase your interest rate and will extend the breakeven point of refinancing.
Weigh your options.
Choosing to go with a lower interest rate sounds like a no-brainer, but before signing any paperwork it’s important to calculate all costs included with your refinancing option. If you’re spending $5,000 in closing costs, how long before the savings in monthly payments covers the closing costs? If you’re planning to live in the home for 10-30 more years, it could be enough time. However, if you plan on moving anytime soon, it may not make much financial sense.
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