TIME IS RIGHT
Big savings available by refinancing your mortgage at today’s historically low rates
Would you spend a few thousand dollars now to earn back $30,000, $40,000 or $50,000 later?
For most people, that’s a no-brainer, and with mortgage rates at historic lows, homeowners who fail to refinance from yesterday’s rates to today’s rates could be depriving themselves of savings that could be put to more productive use later in life.
But like all financial benefits, refinancing requires acting when rates are low, doing your homework, comparing available deals, and, to achieve the largest potential benefit, spending upfront money on closing costs and sometimes a bit more money on your monthly payment.
However, many homeowners can still realize significant monthly and overall savings by refinancing with no upfront out-of-pocket costs.
Mortgage finance experts say now is an ideal time for homeowners to seriously consider transferring their old loan to a new one. Failing to act could mean losing a historic opportunity if rates start rising again.
Here are some concepts and tips from mortgage finance experts that can help you determine whether a refinance is right for you. This discussion assumes you’re looking to lower the cost of your home and not to get cash out of your equity.
What are today’s interest rates?
For a ballpark figure, a good place to start is Freddie Mac, the governmentbacked agency that secures a large percentage of mortgage loans, along with Fannie Mae. On June 25, Freddie Mac’s survey of mortgage lenders found the average 30-year fixed rate was 3.13% and its average 15-year fixed rate was 2.59% — near or at historic lows.
By contrast, in November 2018, the average 30-year fixed rate was 4.94% and the 15-year fixed rate was 4.36%. If you bought your home at those rates less than two years ago, you should definitely look at refinancing to take advantage of the decline, says Gino Moro, home financing specialist at Hollywood-based Southland Mortgage Inc. and president of the Florida Association of Mortgage Professionals.
How much lower should the current rate be before it makes sense to refinance?
When rates are this low, it makes sense to look into refinancing if your loan rate is at least a half of a percentage point higher than the current rate, says Joel Kan, assistant vice president of economic and industry forecasting for the Mortgage Bankers Association.
Exceptions include loans with relatively low balances, such as $100,000, Moro says. In such cases, consumers must weigh what they can save against how much they’ll pay in closing costs.
Whatever they decide, it’s important that consumers not get fixated on small differences in interest rates, he says.
“Consumers often only look at the interest rate. They think it’s the most important thing. It’s not. It’s really the least important thing,” he says. Most important are your overall costs, if you plan to stay in your home for a long time, or how quickly you can start saving money on your monthly mortgage payment if that’s your goal.
What are closing costs and why are they important?
You can’t weigh the pros and cons of refinancing if you don’t face the reality of closing costs.
Like death and taxes, closing costs are unavoidable in any refinance or straight real estate purchase transaction. If a refinance deal is advertised as “no closing costs or fees required,” that just means the lender is hiding those costs under a higher interest rate, Moro says.
Fees include the lender’s underwriting fee, appraisal fees, state taxes, local recording fees, title insurance and settlement fees, plus broker’s commission.
Closing costs can range from 2% to 6% of your loan amount, depending on the loan size and they average $5,779, according to recent data from ClosingCorp, a real estate data and technology firm.
Moro says he advises borrowers to pay these fees upfront if possible because you’ll have to pay interest on them if you roll them into the loan, reducing the savings you will realize when refinancing.
What type of refinance will save me the most money and which will save the least?
The best deal you can make if you plan to remain in your home indefinitely would be to go from your 30-year loan to a lower-interest 15-year loan, even if that means paying a larger mortgage bill each month, Moro says. Not only will you get a bigger interest rate drop than if you went into another 30-year loan, you’ll pay off the home much more quickly and save tens of thousands of dollars in interest.
The worst choice that borrowers can make if they are several years into a 30-year loan and plan to stay indefinitely is to start over again with a new 30-year loan just to save $100 or so a month, Moro says. Because the interest is front-loaded to the earliest years of the loan, starting over means you will delay by years getting to the point in the loan where you start paying down the principal and over the full term won’t save much, if any, money.
On the other hand, getting into a new 30-year loan to reduce your monthly payment can make sense if you haven’t been in the home for long, he says.