If you’re serious about reducing the interest you owe on your mortgage, refinancing could be a good bet. It can reduce your monthly payments and help you pay off your home faster. Here are some options when it comes time to refinance.
Getting a rate reduction :
Most consumers elect to refinance to secure a lower amount with a lower rate of interest. In some cases, dropping excess costs such as private mortgages can be a smart financial move, but rate reduction remains large. In many cases, it can make sense to refinance even if you can reduce your interest by as little by as little as .25% and save as little as $50 a month.
Finding a mortgage lender who is interested in establishing a long-term client relationship is key in securing a lower interest rate without paying fees to originate the new loan. It also helps to have a solid credit score since the better your credit, the better the interest rate you will qualify for.
You can alternately pay fees to purchase a lower interest rate, and subsequently, a lower payment. The trick here is to determine when you’re going to recuperate any fees paid and ultimately break even.
Generally, a good way to determine this point in time is to take the fees paid to originate the loan, and divide them into the monthly savings generated by the proposed refinance. The optimal timeframe is a quick recapture, such as within 12 months or less. That short of a timeframe is reasonable with rates currently in the under 4% range on the long-term, fixed-rate mortgages.
Moving into a shorter term loan :
In some cases, when the rate on your 30-year fixed-rate mortgage is over 4.0%, it might be worth paying a few hundred dollars more per month to move into a 15-year or 20-year fix-rate mortgage that significantly reduces how much in total you will owe over the life of the loan. This move can be particularly manageable if you have already been pre-paying your mortgage anyway in an effort to pay off your home.
Remember, when you move into a more aggressive mortgage pay off, the lion’s share of the payment goes to principal and less to interest. Working in tandem with a lower rate over a shorter term, a 15-year fixed-rate mortgage is far less likely costly than its 30-year fixed-rate counterpart.
Mortgage tip : As long as rates on longer-term loans, like the 30-year fixed-rate mortgage, continue to remain around under 4.0%, all rates on shorter-term loans should remain favorable as well, including 25-year, 20-year, 15-year and 10-year fixed-rate mortgages.
A word to the wise : It’s always a good idea to make sure you have your most recent mortgage paperwork in electronic PDF format ready to go for a lender. This way, you can be nimble enough to act quickly on a refinancing opportunity should one present itself.
