If you’re serious about reducing your interest expense associated with your mortgage, refinancing is a guaranteed bet to reduce your payment, reduce your cost of funds and pay off your home faster. Haven’t refinanced yet? Know your options...
Rate Reduction
This is number reason most consumers elect to refinance. The biggest driver of payment reduction in most cases is financing a lower loan amount coupled with a lower rate of interest.
In some cases dropping excess costs such a private mortgage insurance is smart financial move. By and large, rate reduction remains king. Even if you can reduce your interest as little as .25% it still makes sense to refinance even if you’re saving as little as $50 a month. The linchpin in such a scenario is fees. Use the lender’s money to reduce your rate whenever possible.
Ideally, a lender who is interested in the long term client relationship by identifying opportunities in the market for you to refinance your loan at little or no cost is the best choice.
Alternatively, paying fees to purchase a lower rate of interest and subsequently a lower payment as a result is the next logical step in this scenario. The focus then becomes determining when you’re going to recuperate any fees paid.
Generally, a good way to determine this is point in time by taking the fees paid to do the loan, divided into the monthly savings benefit generated by the proposed refinance. The optimal time frame is a quick recapture such as within 12 months or less. That short of a time frame is reasonable with rates currently in the under 4% range on long-term fixed rate money.
Moving Into A Shorter Term Loan
This strategy for the right consumer can be very appealing. In some cases when your rate is over 4.0%, it might be an extra few hundred dollars per month to move into a 15 year or 20 year fixed rate mortgage getting out of your current 30 year fixed rate, something manageable if you have already been prepaying your mortgage anyway in an effort to pay off your home.
Let’s say you took out a 30 year fixed at $450,000 at 4.375% back in 2010 and you can redo your mortgage amount to a 15 year fixed rate loan at today’s rate of 3.25. Based on an amortization schedule your principal loan is now down to approximately $409,000 and you still have 25 years left to go to get rid of the note, not to mention all the extra interest you’re taking the full 360 months to pay off the obligation. If you were to take the current payment on the 30 year mortgage and compare that to a 3.0% 15 year mortgage, the payment spread is $626 per month more for the 15 year term. Remember when you move into a more aggressive mortgage pay off the lion’s of the payment goes to principal and less to interest working in tandem with a lower rate over a shorter term, this why a shorter term loan structure like a 15 year fixed rate is far less costly than its 30 year fixed rate counterpart.
Mortgage Tip: as long as longer-term rates i.e. the 30 year fixed-rate mortgage continue to remain under 4.o%, it’s a pretty safe assumption all rates will remain favorable on the other loan term products as well including 25 year, 20 year, 15 yr and 10 year fixed rate loans.
Following is spread expectations between various fixed rate loans when determining whether you should refinance or not your own mortgage or stay put.
→30 year fixed rate to 25 year fixed rate – pricing is nearly equal
→30 year fixed rate to 20 year fixed rate- .5% better in rate on the 20 year term
→30 year fixed rate to 15 year fixed-approximately 1% or 100 basis point difference
A word to the wise is the always make sure to have your most recent paperwork in electronic PDF format ready to go for a lender. This was you can be nimble enough to act quickly on an opportunity should one present itself. Looking to buy or refinance your Santa Rosa Mortgage? Get a free rate quote online now.
