Mortgage rates have been on a steady decline the last couple months, and thanks to recent monetary action by the Federal Reserve, they hit all-time lows late last week, with the 30-year FRM shattering the 4 percent barrier and falling to 3.94 percent. As a result, refinancing has been on the uptick as rates have fallen, with weekly application volumes at 80 percent in recent weeks. And for good reason – when done right, refinancing can save a homeowner thousands, if not tens of thousands, of dollars, and even eliminate entire years of payments from a loan.
But how can a homeowner ensure that his or her refinancing venture is financially logical? Here are a couple big points to consider:
1) Do not get hung up on monthly payments.
Nobody likes high monthly payments, and any refinancing option that would lower a monthly payment sounds great, right? Well, there are several options to consider before pursuing that monthly payment, as Ilyce Glink of the Chicago Tribune points out. For one, consider how many years are left on the loan. If a homeowner is 15 years in on a 30-year loan, it hardly makes sense to refinance to a new 30-year mortgage, even if the monthly payment is lower.
Instead, think about refinancing to a loan with a higher monthly payment but with less years on the loan. As Glink writes, “If your new payment costs you more each month, it’s only worth refinancing if you’ll shave years off of your loan term. In other words, if you have 15 years left on your loan but can get a 10-year loan that will cost you the same or even a few dollars more each month, it might be worth refinancing.”
It sounds crazy, but Mary Ellen Podmolik, also of the Tribune, offers a superb example of how that process can work: a 30-year FRM of $100,000, at 4 percent, yields a monthly payment of $477; a homeowner with that mortgage would pay $172,000 over the lifetime of that loan. Say that homeowner refinances, though, to a 15-year FRM at 3.25 percent. The monthly payment jumps up to $702 a month, yet the lifetime cost of the loan plummets to $126,000, a savings of $46,000! Clearly, there is more to refinancing than a lower monthly payment.
2) Do not forget the details
As great as refinancing sounds, both Podmolik and Glink point out several factors that homeowners must remember when considering refinancing. First of all, do not forget that there are fees attached to a refinancing. High fees can influence not just the cost of the refinancing, but also the interest rate, if the fees are lumped together with the new loan amount. Also keep in mind that to qualify for refinancing, a homeowner must have pristine credit (at least 700) and decent equity in his of her house.
And lastly, bear in mind that the rates that a news agency publishes – this story included – do not necessarily reflect the interest rate a homeowner will receive in a refinancing. Markets shift by the millisecond, and a credit report that is a few days old, if not a few hours, will not accurately reflect rating conditions. As Podmolik writes, “Homeowners should use the weekly rates announcements from Freddie Mac and the Mortgage Bankers Association as a guide only because they are dated by the time they are announced.”