According to the Mortgage Bankers Association, refinance mortgage applications accounted or approximately 66% of all mortgage applications in early October. With near-historic current mortgage rates, the lure of lowering their monthly mortgage payments in order to save hundreds of dollars per month, thousands of dollars per year, and hundreds of thousands of dollars over the life of a mortgage loan, homeowners in mass raced to refinance their existing mortgages with significantly lower mortgage rates.
However, refinancing costs time and money. Mortgage lenders have tightened their belts over the past couple of years, so obtaining a new mortgage is not as easy as it once was. For example, borrowers at one time were able to simply state their income and state their assets to a mortgage lender, and if it made sense, a mortgage loan was issued. These days, those stated-income and stated-asset mortgage loans are very far and few between. Now, borrowers must gather documentation to prove income and assets, among other items that must be documented, in order to be considered credit worthy to be granted a mortgage loan. In addition, closing costs must also be considered.
In the end, there are three main reasons in which homeowners should consider refinancing their existing mortgage:
1. Lowering the Mortgage Rate by a Half Point or More
If you plan to stay in your home, refinancing to a lower mortgage rate by at least a half point is worth the time, effort and closing costs. For example, if you have an original mortgage loan size of $250,000 with a rate of 6% on a 30-year fixed-rate mortgage, your monthly principal and interest payment is approximately $1,499. Assuming you’ve paid down the principal balance on your mortgage loan over the years and you now have a balance of $235,000, it would be wise to roll all closing costs into the new refinance mortgage loan. If closing costs are approximately $3,500, your new loan amount would be $238,500. By lowering the mortgage rate by a half point to 5.5%, your monthly principal and interest payment would be reduced to $1,354. By lowering the mortgage rate by .75 to 5.25%, your monthly principal and interest payment would be reduced to $1,317. By lowing it one full point to 5%, your monthly principal and interest payment would be reduced to $1,280.
| Original Mortgage Rate |
Original Loan Amount |
Original Principal & Interest Payment |
| 6.000% |
$250,000 |
$1,499 |
| |
|
|
| New Mortgage Rate |
New Loan Amount |
New Principal & Interest Payment |
| 5.500% |
$238,500 |
$1,354 (savings of $145 per month) |
| 5.250% |
$238,500 |
$1,317 (savings of $182 per month) |
| 5.000% |
$238,500 |
$1,280 (savings of $219 per month) |
To calculate when you would recoup the closing costs, simply divide the closing costs ($3,500 in this scenario) by the monthly savings. At 5.5%, the monthly savings would be $145 per month. Therefore, it would take approximately 24 months to recoup the closing costs. If this homeowner intends on remaining in the home for at least 24 months, then refinancing makes great sense. If you’re still not convinced, then take a look at the chart below for additional information on the same scenario:
| Mortgage Rate |
Monthly Savings |
Annual Savings |
Total Savings |
| 5.500% |
$145 |
$1,740 |
$52,200 |
| 5.250% |
$182 |
$2,184 |
$65,520 |
| 5.000% |
$219 |
$2,628 |
$78,840 |
Who couldn’t use an extra couple hundred dollars per month? The above figures are evident … lowering your mortgage rate will save you tens of thousands of dollars.
2. Need Extra Cash
Until the housing crisis struck, homeowners in need of some extra cash to fund a child’s education, go on a much-anticipated family vacation or put an addition on the house simply tapped into the equity in their homes via a home equity line of credit (HELOC) or a home equity loan (HELOAN). Now more than ever, these types of loans are increasingly difficult to obtain, due in large part to the plunge in home prices during the recession. As the economy worsened, banks became increasingly more cautious, and will likely not make similar mistakes now that the economy has stabilized.
Now, however, to tap into the equity in their homes, homeowners are accomplishing the same goals simply by refinancing their existing mortgage loans and taking an excess cash amount. A cash out refinance involves a new mortgage loan that is larger than the borrower currently owes, allowing them to use the difference for their own desires. One caveat to a cash out refinance is that mortgage lenders are now requiring between 20% and 30% equity in the new mortgage loan. If there is not at least 20% to 30% equity left in the home, a cash out refinance is no longer an option.
3. Adjustable-Rate Mortgage (ARM) About to Reset
The economy is stabilizing, and mortgage rates are expected to rise rapidly in the very near future. In fact, we are already witnessing daily mortgage rate increases, often a couple of times throughout the day. Homeowners who currently have ARMs should seriously consider refinancing into a fixed-rate mortgage now before rates actually skyrocket.
By refinancing now, however, there is a chance of homeowners missing a year or so at a low mortgage rate with their existing ARM if it resets below 5%. Nevertheless, throughout the life of the loan, these same homeowners will save thousands of dollars as rates drastically rise.
With today’s low current mortgage rates, it’s quite possible there are homeowners who can take advantage of at least two, possibly all three of the scenarios discussed above. If you still have questions, or would like to lock in a low current mortgage rate today, call (877) 868-2503 to speak with a licensed mortgage professional now.
–Robert Hyder
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