Mortgage Resource Center

Empowerment through Education
Jul 27, 2017
When Does Refinancing Make Sense?

You finally bought your dream home. You saved up, you scouted around for houses and you found “the one.”  The one where you and your family could build a life.

You’ve been making mortgage payments for a while, but you keep reading about refinancing. It’s been that “thing” that you think about but never do.

But why not?

There are a bunch of reasons to refinance and they’re all pretty much there to help you in the long run - if you do it right. Interest rates are still low, especially compared to other periods over the years when rates skyrocketed.

So let’s take a look some of those benefits to find out, which goal meets your needs:

1. Get out of the mortgage insurance web

If you purchased your home with less than 20% down, you had to get mortgage insurance - another payment on top of the mortgage. Now you’ve paid down on the mortgage and your home is worth considerably higher in value.

Note that with a Federal Housing Administration (FHA) loan, you can’t cancel mortgage insurance. However, you can get rid of the insurance by refinancing into a non-FHA loan. Then, you can drop that mortgage insurance and set yourself free.

2. Lowering your mortgage payment and current interest rate

Another popular reason homeowners refinance is to lower their monthly payment - in other words, lowering their interest rate.

Savings can vary on a case by case basis. On average, homeowners save around $250 each month, which totals $3,000 a year. That's a lot of money to be giving away each year.

So let’s take look at a real-life example to understand how saving a couple hundred dollars a month can save you tens of thousands over the years.  

Let’s say you bought a home three years ago with a 30-year term, $250,000 loan amount, at a rate of 4.5% with a monthly mortgage payment of $1,266.71.  

Now, if you paid the minimum payments for three years, your mortgage balance today would be $237,000. Let's say you decided to refinance to a lower interest rate of 3.5% of a new 30-year term; your new monthly mortgage payment would be $1,064.24. Each month you would save $202.47.  

I know what you're thinking - that it doesn’t sound like a lot of savings per month and you're extending your term back to a 30-year mortgage, which is adding three years on top of your current remaining term but consider these two scenarios:

 

Option 1: Pay Your Mortgage Off Faster & Save The Most

Extending the mortgage from 27 to 30 years might seem counter intuitive, but you’d still save money!  Here’s how:

The $202.47 monthly savings from getting a lower rate of 3.5% could be applied towards the principle of your new mortgage.

Using the monthly savings of $202.47 towards the principal will decrease the total amount of interest you would have paid on your old mortgage.

(To learn more about what makes up a mortgage payment, check out our blog here.)

Here it is in plain numbers and how this option would allow you to pay off your mortgage faster:

If you continued paying the $1,266.71 on the new loan instead of the $1,064.24, you would pay the new 30 year mortgage off in 22 years and 7 months, saving you 53 payments that would be equal to a total of $67,135.63 - Who knew $202.47 towards your principal each month could save you that much! 

Option 2: Pay The Lower Payment & Still Save

If you refinanced because you needed to have a lower monthly payment, you’re still in luck!

Sticking to our example, you would still save $202.47 per month, which would offer immediate savings.

PLUS, at the end of the new 30-year term, you would still save $26,424 with the lower 3.5% rate compared to your original 4.5% rate when you bought your house three years ago.

So either way, refinancing to a lower rate will help you save tens of thousands of dollars!

3. Shorten your term and pay your mortgage faster

Wouldn’t it be nice to take that long 30-year term that seems like forever and reduce it?

Sure you can pay down more on your principal every month, but when you officially shorten the term, you’re on an actual schedule, so you don’t miss the extra payments every month.  

Don't forget that lower term mortgage also comes with lower interest rates. For example, today's 15-year fixed rate is a full 1% (or 1 point) lower compared to a 30-year rate.  Now that's savings.

You can choose your own custom loan with its own term, from an 8-year to a 14-year, all the way up to 30 years. It’s up to you, and we can help you with it.

If you know you want to start traveling with your partner in 10 years and not be tied to paying off a mortgage, you can prepare and do a 10-year term. That long vacation awaits.

4. Consolidate & Pay down your debt

You might have thought about it, but you kept putting it off. However, if you’ve got credit card debt in the thousands or more interest rates upwards of 16.7%, you could be paying a lot of fees and interest for no good reason.

Not to mention, you could be paying the minimum monthly payments for a long time if you’re not paying towards the principal balance.

If you have equity in your home, it might be a good opportunity to cash out some equity to pay off those high-interest credit cards or bills.

Your mortgage rate will be much less than the credit card interest and money you’ve been wasting trying to pay down those cards.

5. Upgrade your home & Invest in you

You can also use that home equity to buy some upgrades. Think of that bathroom, kitchen or even an additional room you’ve wanted to add on to your home.

Now might be the perfect time for a cash-out refinance or construction loan. 

Refinancing is not a four-letter word. If anything it can be a positive step in the right direction for you, your family, your home and your future.

If you want to learn more about refinancing and how it can help, give us a call at 201-393-0200 to speak to a Home Loan Expert.

 

 

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