With mortgage rates still at near-historic lows, many homeowners are wondering whether they should consider refinancing. After all, it could save you some serious cash.
For example, if you took out a 30-year, $200,000 fixed-rate mortgage a few years ago at a rate of 5 percent, you’ll pay a total of $186,508.65 in interest. But locking in at today’s rate of 3.63 percent means paying $128,558.28 in interest for the same 30-year loan, saving you a total of $52,950.37 over the life of the loan. You can reduce the term to a 20-year mortgage for only $100 more per month, which will result in paying only $81,597 in total interest.
The savings is tempting, but there is more to think about than interest rates, and it’s not for every situation. Consider these tips before embarking on your refinance:
Scrutinize the details. Get a good-faith estimate from your lender and make sure they go over all the costs involved. Compare the costs with the amount of money you would save in the first year of your new mortgage before deciding if there is enough savings there to make it worth it.
Look at the rate sheet. Ask if you are getting locked in, and if so, for how long. Also ask how many points you are paying to get the lower rate. Points are fees paid to the lender at the closing in exchange for a lower interest rate over the life of the loan. Each point represents 1 percent of the loan amount. The longer you stay in a home, the more you can benefit from buying points.
Check your savings account. Don’t use up all of your savings to do the transaction. You should always try to have a minimum of six months of emergency cash stashed to cover expenses. This way, if you face unexpected job loss, illness or other life circumstances, you will still be able to pay your mortgage for a period of time while you get back on your feet.
Determine the term. Deciding between a 15-year or 30-year mortgage should be based on what you can afford and your life circumstances. Talk to your financial adviser to determine whether you should be positioning yourself to aggressively pay off your mortgage or use your cash for other investments. If you can make the higher payment, have a healthy emergency fund and can meet retirement and other savings goals, a 15-year mortgage can help you pay substantially less interest.
Your bottom line:
Talk to your lender about your refinance options, and don’t be afraid to shop around.Lisa Traulsen is a mortgage loan officer at CU Community Credit Union, which offers checking, savings, loans and investment options to people in Greene and Christian counties. You can reach Lisa at firstname.lastname@example.org.This article ran February 24, 2013, in the Springfield News-Leader.