Following the Great Recession, mortgage rates plunged to historic lows in 2012. This presented a perfect opportunity to refinance and capture the savings. Many homeowners did, but some may have missed the boat.
Good news: the recent downtrend in rates has provided a second chance. And while this downtrend seems likely to continue for some time, it makes sense to start evaluating alternatives in order to profit from this new era of low rates. Let’s look at some options.
Suppose you took out a 30 year fixed-rate mortgage five years ago, leaving an additional 25 years on the loan. Assume the remaining balance today is $150,000, and your interest rate is 4.5 percent. Principal and interest payments are $834 per month (excluding any taxes, insurance or escrow payments). Over the remaining life on the loan, you will end up paying $100,000 in total interest.
What if you refinanced with a new loan at the current 3.8 percent average rate? Note first that these rates are available only to borrowers with good credit (generally a FICO score of 720 or better), and the comparison assumes a new 25-year loan. Many mortgage lenders today allow you to choose customized maturities. Try to avoid starting over with a new 30-year term.
Your monthly payment would fall to $775, saving you $17,000 in interest payments over the life of the loan. However, you must consider the closing costs and fees in order to evaluate the trade off. If the cost of refinancing is estimated to be $4,000, you will break even after about 5 years. Borrowers who plan to remain in the home for a longer period of time may find this worth the effort.