Mortgage rates have dropped to levels not seen since 2016 and homeowners are rushing to refinance. You can benefit even if you don’t cut your rate by a full percentage point – a rule of thumb you can safely ignore. The question is whether you will stay in your home long enough to recoup the closing costs with savings on your monthly payments. For a quick answer, run the numbers using the refi break-even calculator at bankrate.com.
Borrowers who closed on their loans in 2018 are leading the charge, according to Black Knight, a mortgage data, analytics and software provider. If, for example, you got a $300,000 mortgage with a 30-year fixed rate of 4.5% last fall. If you refi to a rate of 3.8%, the national average rate reported by Freddie Mac, you would cut your monthly payment of principal and interest by $145, to $$1,375 and you’d pay for your total closing costs (estimated at 2% of the loan balance) with monthly savings in 41 months. If you originally took out an FHA loan but have since improved your financial profile or accumulated 20% equity, you can refi into a conventional loan and not only reduce your interest rate but also eliminate the cost of mortgage insurance, which applies permanently on most FHA loans.
Next, check your credit. The stronger your qualifications (the more equity you have, the higher your credit score, and the less debt you carry), the lower the interest rate you’ll be able to get. Rates will be higher if you take cash out, take out a high balance conforming loan amount, or are refinancing a multi-unit or investment property.
You could pay the closing costs out of pocket, but before you do, consider how you could utilize the money for a better return. If you have enough equity, you can add the closing costs to your loan balance and finance them. With rates so low, the impact on your monthly payment could be negligible. You could pay a higher interest rate in exchange for a lender credit that off-sets closing costs.
Homeowners have amassed nearly as much home equity as they had before the housing bust, but they have been cautious about extracting it. Freddie Mac says that homeowners who are tapping their home equity through cash-out refinancing are using the money to pay off more-expensive debt, make repairs or improve their homes, add to their savings, buy a car or other major purchase, or save or pay for college expenses.
This article was written by Melanie Sedam who is the owner/broker of ReverseMortgage62AZ.com, an Arizona licensed mortgage broker who specializes in both reverse mortgages and conventional financing. She can be contacted at 520-829-5219 ext. 3.