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Should You Refinance?

piggy-bankPerhaps you didn’t get around to refinancing your mortgage while rates were lower over the past few years. But over the summer, mortgage rates dropped again. In fact, the day after Great Britain voted itself out of the European Union, rates dropped as much as .125 percent.

A primary factor in deciding whether to refinance is how long you expect to stay in the house. If your near future is a bit tenuous, the cost of refinancing may not warrant the monthly savings over a short term. On the other hand, if you’re in your house for the long haul — preferably until you pay it off — the savings from refinancing may be worth the effort.

The first thing to do is check out current rates and run the numbers. As of Sept. 8, 2016, the average Freddie Mac interest rate for a 30-year mortgage was 3.44 percent. For the sake of comparison, let’s look at the following hypothetical situation:

  • In 2006, you bought your home for $325,000 with 20% down and a 30-year loan with a 6.15% interest rate
  • Your current monthly payment is $1,584 and you owe about $212,000
  • Assuming $3,000 in additional expenses, if you refinance this year at the current rate of 3.44%, your monthly payment will drop to $958

The good news is that will save you about $625 a month, or $7,500 a year. The bad news is that you’re under contract for another 30-year mortgage. As an alternative option, you may consider refinancing for a 15-year term at the current rate (as of Sept. 8, 2016) of 2.76 percent.

In this scenario, your monthly payment would be about $1,460. That’s not nearly the savings of the 30-year term, but it’s still $124 less than what you’re currently paying.

The bigger impact is that you’ll end up saving more than $100,000 over the term by refinancing at a lower rate, with an added bonus that you can stop paying your mortgage five years earlier.

This is a hypothetical example provided for illustrative purposes only; it does not represent a real life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation. Be sure to consult with a professional mortgage lender or broker to help decide what’s best for your unique situation.

Source: AE Marketing Hub