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April 4, 2018
While still historically very low, mortgage rates have been ticking up for the past few months and there is uncertainty if that increase will continue or stabilize. Now could be the best time to refinance your loan, before rates rise even higher. A refinance could reduce your rate or payment, allow you to fix a variable-rate loan or change the term to shorten your repayment or lower your payment. Often refinancing will save you money, but sometimes the cost of the refinance, the term of the loan, or the fine print conditions can lessen your savings.
Get started with these tricks:
Start with your existing mortgage lender
Often lenders have special deals for current customers. For example, there may simply be a processing fee to lower your rate, which could save you the time and hassle of extra paperwork. Better yet, if you have an excellent repayment history, they’ll know it and may streamline the process for you. However, if they can’t offer you a better deal, you should shop around.
Calculate your breakeven
This is when you figure out if the cost of the refinance outweighs the financial benefit. The key is knowing specifically about the closing costs, points, and fees you will pay to refinance. Your mortgage lender is required to provide you with a good faith estimate within three business days of your approval.
Take the cost of refinancing and divide them by your monthly savings to determine how many months it will take you to breakeven. Don’t forget to account for any home equity loans or lines of credit that you’d like to refinance. If you’re planning to be in your house for a while, a reasonable breakeven period is 1-2 years.
Change the loan, keep the term
It’s easy to save money if you extend your term; however, it may not be prudent as you will likely pay more in interest charges. For example, if you had a 30-year mortgage and have lived in your home for 5 years, refinancing to the full 30 years again means you’ll be paying on your home 35 years, which is not as cost effective. Savvy refinancers often match their new term to their current remaining term. In this example, 25 years. Better yet, choose a slightly shorter term to pay off your home sooner.
Again, consider any second mortgage loans. Since home equity loans and lines of credit tend to have shorter terms, if you refinance these balances to a new first mortgage, you may be extending a 15-year loan out to a 30-year term. It may save you money monthly, but substantially increase the interest paid over the long run.
Low rates, go long
Don’t be fooled by low variable rates. Even though a fixed-rate loan payment may be a bit higher now, the rate is guaranteed to stay the same for the life of the loan. A variable rate will continue to rise with the market over time. Today’s rates continue to be low, making it the lowest cost option if you plan to stay in your home for many years to come.
Mortgage documents can be intimidating, but it’s important to read the fine print. Check that the interest rate matches your quote. Review the closing costs to ensure they reasonably match the estimates you received. Finally, confirm there is no pre-payment penalty, otherwise paying off your mortgage early could be costly.
Remember that everyone’s situation is different. Consider how long you plan to be in your home and what you can afford. You can always call one of our real estate team members for current rates, payments, or to apply.