CFC News Release
RATES MAY BE CLIMBING GRADUALLY,
BUT REFINANCING YOUR MORTGAGE - AGAIN -
CAN STILL SAVE MONEY, BUILD EQUITY
Mortgage rates, while higher than they were a month or two ago, are still very low. If your current interest rate is at 6.5 percent or above, you may be missing out on a great opportunity to save even more on your monthly payment while building equity in your home more quickly.
"People who refinanced their mortgage last year or who have an adjustable rate mortgage (ARM) that's low, should consider refinancing now, given the current low rates," says Henry L. Shulruff, president of Capital Funding Corporation.
Homeowners who refinanced at 6.5 percent last summer could possibly lower their monthly payment by hundreds of dollars annually and save several thousand dollars over the life of the loan, depending on how much is borrowed.
Homeowners with adjustable rate mortgages should also consider the benefits of refinancing. Shulruff explains: "You can lock in a low, fixed-rate mortgage now and avoid the uncertainty of fluctuating interest rates and payments, or refinance with an adjustable rate mortgage and reduce the interest rate at which initial payments are calculated."
Low interest rates also offer a good opportunity for first-time buyers and those who wish to upgrade their home. "Naturally, those who refinance must consider closing costs and related expenses; however, low interest rates can present a golden opportunity for those who are ready to purchase a home or move into a more expensive home," he says.
Refinancing can also help accelerate the rate at which homeowners build equity in the home. Homeowners who are willing to convert a 30-year term loan during its first ten years to a 15-year term will build equity at a much faster rate. "Although monthly payments will increase, it may be worth it, depending on many factors, such as the length of time you intend to stay in the house, the closing costs associated with the refinance, and your family's future financial needs," Shulruff says.
For example, on a mortgage of $120,000 at a fixed rate of 6.0 percent for 15 years, the borrower would pay approximately $1,012 a month for principal and interest. That's roughly $254 more per month than a 30-year mortgage at 6.5 percent, but the borrower will save more than $90,000 over the life of the loan and is building equity at a much faster rate.
Consider Related Costs
As you evaluate whether the net savings would be substantial enough to justify refinancing, you should consider the closing costs associated with refinancing. Once you have an estimate of what those costs will be, determine how long it will take to recoup them based on the monthly savings of your new payment. If you plan to stay in the house at least that long, that's a positive indicator that now is the time to refinance.
Refinance costs may include a credit report, an appraisal, document preparation fees, and title insurance. There may also be escrows for homeowners insurance and real estate taxes. Depending on the lender, you may have to pay one or more "points" with your new loan. A point is a percentage of the principal and is collected by the lender at the time the loan is made.
"A real estate attorney can help you sort through the various services and help you make the best choice, given your situation," says Shulruff.
Mortgage Options
An attorney can also help you determine which type of mortgage option is best. The most common financing arrangement is a fixed-rate mortgage, which is a popular choice among homebuyers now because rates are low and the monthly payments remain the same for the life of the loan.
Another common mortgage - the adjustable rate mortgage where payments fluctuate depending on the interest rates - provides the borrower with a lower interest rate. Borrowers are able to qualify for a larger loan than if they applied for a higher rate fixed-mortgage.
Other mortgage products available are:
- convertible adjustable mortgage which allows the borrower to turn it into a fixed-rate mortgage in the future;
- rollover or balloon mortgage where the loan is renegotiated at the end of one or more set periods of time;
- graduated payment mortgages which are long-term, fixed-rate mortgages with initial payments that are too low to pay the interest on the loan amount with the monthly payments gradually increasing; and
- growing equity mortgages which accelerate the loan payoff time by gradually increasing the principal payments while the interest rate remains the same.