Understanding Mortgage Refinance Rates
There’s a rule of thumb for refinancing a mortgage: If you can’t save at least .5%, don’t do it. However, that is an oversimplification of the process.
You may want to refinance a mortgage simply to shorten or lengthen the term. Or you may want to switch from an adjustable rate to a fixed rate mortgage. Understanding refinance mortgage rates come down to more than trying to shave .5% off or better.
Refinancing involves many costs other than closing costs. There are origination fees, attorney’s fees, home inspection costs, documentation fees, etc. These all must be considered when refinancing.
When looking at mortgage rates, look at your break-even point. See how long you must pay the new loan until you will start saving money. If you plan to sell your home in a few years (and thus eliminating this mortgage) it likely doesn’t make sense to refinance.
An interest rate is a number. It’s easy to understand. Getting the complete picture is more complicated.
Finding the Best Deal to Refinance Your Mortgage
Refinancing a mortgage is about starting fresh on the solid ground. Before signing, consider your options. For instance, should you pay for points? A point is an upfront fee which is 1% of the total mortgage.
It’s paid to the lender in exchange for a lower interest rate. If you plan on staying in the house for a long time, paying for points makes sense. You pay the fee once but the interest rate remains low forever.
Definitely, check to see if you qualify for any special loan programs. There are VA loans, USDA loans, FHA loans, and more. Make sure you’ve exhausted all these options before going with a generic loan. Leave no rock unturned.
Also, ask about closing costs. See if they are necessary. Closing costs are expensive – typically 3% of the home’s purchase price. Make sure there aren’t similar fees to battle. That will just lengthen out your breakeven sentence.
Finally, make sure to check local lending institutions. Community banks and credit unions may offer the best refinancing rates. Just be prepared to wait. Small lenders aren’t usually as efficient as these massive online lenders.
Advantages of a Mortgage Refinance
If you’ve gotten this far, then you probably have a firm understanding that refinancing your mortgage, when done correctly, can offer numerous savings and benefits. Primarily, millions of homeowners refinance in order to get a lower interest rate on their mortgage.
Here are some other advantages to consider by refinancing your mortgage:
- Improve your credit score: If you are encumbered with debt, but have significant equity in your property, you can take a cash-out refinance to pay down other outstanding balances and boost your credit score.
- Increase home equity: On the other hand, refinancing your home mortgage is a great opportunity to build even more equity. You can take the immediate monthly savings and put it toward paying off your payments.
- Reduce your mortgage term: If you have a 30-year mortgage program that you’ve been paying for several years, you may be able to refinance into a 20-year mortgage program instead to save on years of interest payments.
The savings you can accrue with lower monthly payments can be put toward awesome new things, or stashed away in a bank for other important investments.