Are you one of the many home owners on the fence about refinancing your mortgage? Well you’re not alone and you’re probably overwhelmed with questions:
- Is now the right time to refinance?
- Are interest rates low enough to help me?
- How much will it cost me?
- What will my savings be?
- How will refinancing affect me?
The media has done a pretty good job spreading the word that America is in a recession and our financial institutions are on the verge of collapse. But where does that leave us? Unemployment is on the rise and consumer confidence is so low, President Obama had to change his message to the people to say that “things aren’t so bad after all”. What are we to believe and how do we ride out this economic turmoil we’re living in? The answer is to take your finances into your own hands. I don’t believe we should stop living our lives and enjoying the fruits of our labor, but do so wisely. One way to do so is reducing one of our largest financial liabilities, our mortgage. This might not be an option for all mortgage holders, but it’s worth discussing with a qualified mortgage lender. Interest rates are at a historical low right now and the savings can be substantial.
Is now the right time to refinance?
There are some critics that say interest rates may plummet down into the 3% range, so waiting for this down turn will be worth your while. No one knows what the future holds and even the best financial analysts can only speculate. The only thing we know and can control is information we have today. Interest rates may go down or they may jump up. Which turn will have the greatest affect on you? Interest rates will always spike up faster than they will drop so be careful. Interest rates currently are at historically low rates. This is fact. The best case scenario is that interest rates will continue to fall. You can always refinance again. The worst case scenario is rates jumping up and you lose your opportunity to lock in a lower rate. Do you take the bird in the hand now or gamble on lower rates in the future. Only you can make that call. Many people need the savings now and refinancing is their best option. Please keep in mind though that refinances can take up to 60 days to close and not everyone can qualify. You need to have qualifying loan to value ratios and for those living in condominiums, condo lending is getting tougher and tougher.
Are interest rates low enough to help me?
This is a tricky question and the answer is maybe. There are many factors to consider: what is your current interest rate and mortgage payment, how long do you plan on keeping your home, is the dollar amount you’ll be saving by refinancing worth your while, and can you pay back your closing costs to refinance in a reasonable time frame. Traditionally you are looking for interest rates to be at least 1% lower than your current rate, but sometimes even a .5%-.875% reduction can make a difference.
How much will it cost me?
The cost to refinance will depend on how many points you are willing to pay for your loan. 1 point is equivalent to 1% of the loan amount. So if you are borrowing $100,000, 1 point would amount to $1,000. The more points you pay the lower your interest rate. You will also be paying for other miscellaneous lender fees like: appraisal fees, application fees, notary fees, etc. as well as escrow fees. Don’t get overwhelmed with these fees and don’t let them discourage you. When you work with a reputable lender they will provide you with a “Good Faith Estimate”, breaking down all your anticipated costs. At this point your lender can coach you on what kind of loan program to select and how to manage your costs.
What will my savings be?
Your savings amount will depend on how large your current mortgage and interest rate are. Most people refinancing now have interest rates in the high 5%-mid 6% range. Currently, interest rates are at around 4.75%. If you have a mortgage of $500,000 and an interest rate of 6.125%, your monthly mortgage will be $3,038. If you were to refinance at 4.75%, your new mortgage would be $2,608. A savings of $430 a month! But what about the cost I incurred to refinance? Use this simple calculation. Take your total cost to refinance and divide it by your annual mortgage savings. This will show you how many years it will take to recover your cost to refinance. Once your cost is recovered the savings will carry on for the remaining life of your loan!
How will refinancing affect me?
Only you will know the true impact refinancing will have on your life. For many people, life has become a daily struggle to make ends meet. Are you living pay check to pay check? Are your financial obligations becoming more difficult to handle? Are you still able to save money for retirement or emergencies? Refinancing your mortgage may be the answer. Do the math and most importantly, team up with a reputable mortgage lender who will coach you through this process.
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