With refinance rates hovering near historic lows now is the time to take advantage, especially if you’ve been putting it off. Even if you think you won’t qualify there are government refinance programs that can get you approval quickly. Here are several tips to help take advantage of today’s low refinance rates and slash your payments by 25% or more.
Your Best Options Right Now
According to one survey by mortgage giant Freddie Mac the average homeowner lowered their interest rate by 31% refinancing in the third quarter of 2012. This means opportunities still exist if you’ve been procrastinating or were previously denied.
Refinancing with a 30-year fixed rate mortgage is currently averaging 3.54 percent according to Freddie Mac. Surprisingly there are still millions of homeowners out there paying six percent or more.
If you purchased your home under the conforming loan limit of $417,000, refinancing could lower your payment by an average 25% based on today’s refinance rates reported by Freddie Mac.
Underwater Mortgage No Longer a Barrier
If you’re underwater (meaning you owe more than your home is worth) the government refinance program known as the Home Affordable Refinance Program (HARP) can get you approved. President Obama eliminated the 125% loan-to-value requirement meaning millions more underwater homeowners can qualify. The only catch is that your mortgage must be backed by Fannie Mae or Freddie Mac before June 1st, 2009.
If your mortgage is privately held and you don’t meet the Fannie Mae/Freddie Mac requirement there’s not much you can do until HARP 3.0 arrives as it is rumored to remove this requirement.
How Much Will Refinancing Save You?
Suppose you purchased your home for $300,000 at 5 percent several years ago. If you have 80% equity in your home you’ll owe $240,000. Your original mortgage payment was $1610 and qualifying for today’s refinance rates at 3.54% will slash that to $1083 per month. That’s a savings of $527 per month or 33% lower payments.
Is refinancing your home worthwhile? It is if you can balance your potential savings with how much it’s going to cost you closing on the new home loan. Overpaying closing costs like the loan origination fee or discount points can make refinancing a losing proposition regardless of your refinance rates.
You Can Pay Less For Mortgage Refinancing
Assuming you have a credit score of 720 or better, qualifying for today’s best refinance rates isn’t difficult. If you’re sitting at less than 720 and you find lenders are quoting you higher interest rates than they’re advertising the likely culprit is that credit score. The quickest way to improve your credit score is to pay down the balances on all of your credit accounts below 30% of the limit.
Speaking of your credit, if you’re thinking about refinancing your mortgage the first thing you should do before anything is check your credit reports for errors. You can do this for free by visiting the government mandated website AnnualCreditReport.com. If you want to check your credit score there is a fee; however, if you’re a member of a credit union you may be able to get low cost credit monitoring that allows you to stay on top of your credit score throughout the year.
Should you pay that loan origination fee? There are still no fee refinance offers available but you’re trading higher mortgage rates for having the loan origination fee and other closing costs paid for you. The more you pay at closing or by accepting higher refinance rates you’re getting less benefit from today’s lowest refinance rates.
The good news is that many of the closing costs you find in section 800 of your Good Faith Estimate are negotiable. You can pay less for the mortgage origination fee and avoid junk fees like processing, administrative, and rate lock fees simply by questioning and negotiating to pay less or not at all.
How To Quickly Break Even On Your Closing Costs
The test of how good of a deal you’re getting refinancing your mortgage comes not from getting the lowest interest rate but how much you’re paying at closing. Closing costs can be recouped as a side effect of lowering your payment.
You can approximate your break-even point by adding up all of your out-of-pocket expenses including any discount points you’re paying and diving by the amount your payment is going down. This will tell you the number of months it’s going to take to recoup your closing costs. Keep in mind that this calculation only works if you keep the same term-length when refinancing. If you go with a longer term length, say 30-year from a 15-year mortgage you’re never going to break even recouping closing costs thanks to higher finance costs for those extra years.
Suppose for example your out-of-pocket closing costs total $4,000. Refinancing your 30-year mortgage with another 30-year home loan saves you $527 per month from the previous example. In this case it’s going to take you 8 months to break even. In this example mortgage refinancing certainly makes sense based on the savings and speedy recovery of your expenses.
Depending on how much you pay it could take as long as two years to break-even. If you sell or engage in what many financial advisors call serial refinancing you’ll never recoup your out-of-pocket costs meaning you’re losing money no matter how low your refinance rates.
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