Homeowners hoping to lower their household bills can potentially save money every month by refinancing their mortgage. Through a home loan refinance, homeowners could lower their interest rate or adjust their mortgage terms to create a monthly payment that is lower overall. Refinancing may not make sense for every homeowner, but if you’re interested in exploring the options, here are a few key points to consider.
Switching Mortgage Terms
In a typical rate and term mortgage refinance, the homeowner and the lender agree to change either the interest rate or adjust the term of the mortgage. By changing your mortgage term–switching from a 20 year loan to a 30 year loan, for example–you could lower your monthly payment. Since your loan term is extended, you have a longer period of time to repay the loan and therefore the monthly payments will be divided up in smaller portions. This can produce even more significant savings if you switch from a 15 year loan to a 30 year loan. There will be an even greater savings if you can lower your interest rate in the process.
Lowering the Interest Rate
Another option for lowering your mortgage payment is to do a simple rate refinance. Interest rates for mortgages are still very low, especially amid the COVID-19 pandemic and economic slowdown we are currently experiencing. Right now, mortgage rates for 30 year conventional fixed rate mortgages are around 3.37%* Rates for FHA loans are slightly higher, averaging around 3.46%.* Although FHA loan rates are typically a little higher than conventional rates, FHA loans may have more flexible loan guidelines. Talk to a home loan professional to compare rates and programs to see which makes the most sense for your scenario.
What’s the Breakeven Point?
If your current mortgage rate is higher than today’s average rates, it may be worth your while to contact your lending professional to discuss refinancing options. However, when you refinance, there are usually upfront costs involved. When analyzing the savings you could have with a refinance, you’ll need to consider the breakeven point, which is the point at which the savings of a refinance begins to outweigh the cost. For example, if it will take you two years to begin to see significant savings after refinancing your mortgage, but you think your family will outgrow the home in the next few years, then refinancing wouldn’t make a lot of sense. On the other hand, if you plan to stay in your home indefinitely, this could be a great way to see longterm savings.
Other factors to consider when weighing the potential savings of a refinance include…
- LTV (loan to value ratio)
- Fees (loan origination, mortgage application, appraisal, title search, etc…)
- Paying points (paying more money upfront to get a lower rate)
All of these factors will contribute to the amount of savings you could get from refinancing. It’s not always a simple matter of just getting a lower interest rate. By the time you factor in fees, insurance, points and the breakeven point, you may find you need to adjust your refinancing plan in order to produce the best savings.
The first step is to schedule a consultation appointment with a lending professional to crunch the numbers. They can review different refinancing options with you, calculate the costs vs savings and advise you on the best course of action. To get started, click the button below and connect with one of Luxury Mortgage’s home loan professionals.
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