By now you have probably heard about the historically low interest rates that have been in the housing market for the last few years, but do you know if you should be taking advantage of these rates? Many mortgage lenders will advertise for anyone and everyone to come and refinance, but it’s not actually the right move in every situation. Here is how you can figure out if it’s the right move for you.
Analyze the Differences Between Loans
Start with an honest appraisal of your current loan situation. Write down:
- Your monthly payment, including principal and interest (not including homeowner’s insurance, since this cost is more or less fixed regardless of your interest rate)
- Your current interest rate
- The remaining balance on your home loan
- Remainder of your loan term, in years
Next, you want to look at the new loan you will get if you refinance. Write down:
- The new interest rate you will get (don’t just estimate based on the lowest available rates, talk to a mortgage loan company in Salt Lake City to help you get an accurate estimate of what you might be able to get approved for)
- The remaining balance on your loan (the amount you will be financing)
- The term of your new loan, in years
- Total closing and other costs
Calculate Your Break-Even Point
Armed with this information, the next step is to calculate exactly how long it will take you to “break even” on your new loan. If you refinance, you will save money on your monthly payments with the lower rate, but you will also have some additional closing costs. You may choose to pay these up front in cash, or have them rolled into your new home loan. Either way, you will need to calculate how long it will take for the savings on your loan to make up for the costs.
For example: if your new payment is $100 less than your old monthly payment after a refinance, and the closing costs are $4,000 total, it will take 40 months to break even on the refinance.
Pay Attention to the New Term
When a new loan begins, the bulk of your monthly payments will go toward paying the interest. Over time, as you pay down the principal balance, the payment shifts toward paying more to principal and less to interest. If you refinance and start the clock over again on your loan, keep in mind that even with some monthly savings, you might end up paying more on the house total over the life of the loan than you will save with a refinance. If you are more than halfway into your loan, talk to a lender about whether or not it makes financial sense to refinance.
Timing the Market
Rates for mortgage loans have been hovering around historic lows for about five years now, but since they are not at their lowest, some homeowners are holding on and waiting to see if they go lower. While you might get lucky and see rates go down even more, what’s more likely is that rates will go back up—and most people know that it’s not a question of if they go up, just when. For that reason, now is as good a time as any to lock in your low rate and make sure you save.
Refinancing doesn’t make sense for everyone. Those planning to move in less than three years, or people with poor credit who would not be able to significantly lower their rates, as well as homeowners who only have a few years left on a mortgage, are usually better off to stick with their current loan. In just about every other situation, refinancing can have many benefits. Talk to Altius Mortgage today to find out if it’s right for you.