This month on the Welcome Home blog, we’re focusing loosely on homework in honor of school starting up again. This week, some thoughts on when refinancing to take advantage of a lower interest rate might make sense.
How’s it going, homeowner? Remember when you had to deal with all of that paperwork around closing your home purchase? That was a lot of work. Good thing you won’t have to deal with anything like that again for a while. Although…
Because mortgages generally encompass five- or six-figures, the interest on this loan adds up to a very significant amount over time. And the lower the interest rate, the lower the amount of money you’ll pay out every month. So as we continue to see historically low mortgage interest rates, it makes sense to dig out that paperwork, take a look at the interest rate you’re currently paying on your mortgage, and make an informed decision on whether a refinance might make sense for you.
Let’s say you have $150,000 remaining to pay on your current mortgage, and your interest rate is five percent. In today’s market, you might be able to refinance that loan at four percent. It would mean dealing with a lot of paperwork again, but it would net you $32,000 in savings over the life of the loan. Not bad for a few days of fairly tedious work!
There are lots of caveats though. First and foremost, refinancing generally won’t be worth your while unless you’re reducing your interest rate by a full percentage point or more. Second, you’ll need to make sure you’ll remain in your home long enough to recover the closing costs involved. The break-even point is usually at least two years – often longer. Beyond that you’ll generally need to have gained some equity in the property, through appreciation in your home’s value since you bought it and/or via reduction in principal owed. Then there are all of the factors you had to face in qualifying for your original mortgage loan – credit score; the home’s current appraisal value; coming up with closing costs, etc…
Bottom line – if you could potentially lower your interest rate by one percentage point or more, and you plan to stay in your home for at least the next few years, you should speak to a homeownership advisor to help you determine whether refinancing is right for you.