Since Freddie Mac first started keeping track of mortgage rates in 1971, current interest rate offers have hit historic lows. During 2010 the average mortgage rate has been well below the 5 percent mark, and in September qualified consumers were able to tap into an astonishingly affordable 4.35 percent rate with an average of .7 points. Because of the ability to borrow money on the cheap, 80 percent of September's entire mortgage loan applications were for refinancing (Mortgage Bankers Association).
"The process of paying off any existing mortgages on a home with a new mortgage loan" ( Mortgage Marvel) is a common strategy implemented by homeowners to reduce mortgage monthly payments, and for good reason. In some scenarios, consumers who opt to refinance their mortgage can shave hundreds of dollars off of their monthly mortgage payments and tens of thousands of dollars off of the lifetime of the loan. While refinancing can be implemented as a cost saving strategy, that is not always the case.
Consumers interested in refinancing need to analyze the big picture before signing on the dotted line. Generally speaking, if a homeowner can find a mortgage rate at least a full percentage point lower than their current home loan, chances are that the financial scale of savings benefits will tip in their favor in the long run. However, since that is not always a sure thing, consumers need to evaluate all the expenses associated with mortgage refinancing, as typically, the move will cost around three to percent five percent of the total loan amount. Common refinancing fees include:
- Closing Costs: Any mortgage transaction, regardless of if it is for a first loan or a home refinance will have additional expenses associated with them. The closing costs are determined by a mix of services rendered in combination with the total refinance amount. While it is possible to save money on closing costs, the expenses can add several thousand dollars to the total refinance bill.
- Discount Points: Lenders tend to charge fees in order to provide consumers with a lower interest rate, and those fees are called points. Each point is 1 percent of the total loan amount and that amount needs to be added to the total list of refinancing expenses. Consumers need to make sure to calculate point expenses per loan, as these expenses will either need to be paid to fully process the loan or may be added to the principal balance due.
- Private Mortgage Insurance (PMI): Lenders require PMI as a level of protection against a loan default. Borrowers are responsible for paying for the coverage and is generally only required if the loan amount exceeds 80 percent of the home's value. Consumers opting to refinance as a way to better manage an underwater mortgage may be laden with the additional expenses.
- Reduced Tax Breaks: For decades, the government has allowed consumers to write off mortgage interest on taxes and a lower interest rate will reduce the level of deductions that can be claimed.
Break Even Point
The expenses associated with refinancing a loan can add up, but if a consumer can make a long-term commitment, a break even point can be met and achieved. Simply put, this calculation will measure the point at which refinancing costs will be completely "paid" by the new monthly savings. To manually calculate, consumers need to compare the total expenses paid for refinancing in relation to the new monthly savings. Using that amount, a length of time for repayment can be determined and as long as a person lives in their home past that point, the savings will outweigh the initial investment. The process of crunching the numbers is even easier on a refinance breakeven calculator.
Credit History Crucial to Refinancing Success
Although the math may work out on paper, only consumers with clean credit histories, FICO scores above 720 and established home equity in the 10 percent to 15 percent range will be able to navigate the new loan application process. If you have already done the numbers and believe that you have the qualifications required to secure a low fixed mortgage rate then Mortgage Marvel is the tool to help you locate the best mortgage rates currently available in your area.