Mortgage rates are on their way down. In fact, they are about to hit 4% for 30-year fixed-rate mortgages. This is good news for homeowners because it presents a money-saving opportunity through mortgage refinancing.
A report by Black Knight revealed that at least 5.9 million people have a chance of refinancing their home loans with lower rates. This figure is a 2 million increase from the previous month. The report further indicates the total amount in savings could hit $1.6 billion which translates to $271 per month per person.
The drop-in rates is a surprise since many financial experts expected them to rise. While this is a great opportunity to save money through refinancing, not every homeowner may qualify.
Take a look at these four areas before you can settle on refinancing your mortgage. Before you refi, here’s why you should scrutinize your debt, income and credit score.
Why Your Debt, Income and Credit Score Matter
When considering mortgage refinancing, analyze your credit before making an application. This move is similar to taking out a mortgage, and your lender will take a look at your debt-to-income ratio, employment history, and credit score before making a decision.
You want to have a credit score above 740 and a 75 percent loan-to-value ratio in order to land the lowest rates. As for your income, that will depend on the lender’s requirements. Often, you’ll need to produce a proof of income if you’re self-employed.
For homeowners with improved credit scores, refinancing may make a lot of sense. This is because interest rates drop around 0.125 percent for every 20-point gain.
This means if you had a credit score of 680 and it jumped to 760, then you’ll benefit from a 0.5 percent interest reduction. If you’re not in a good financial position, don’t let that deter you from considering refinancing in the future. Meanwhile, create a solid roadmap to help you achieve a better financial position for better rates in the future.
How Long You’ll Stay in Your Home
If you’ll move from your home soon, then refinancing isn’t the best move. Here’s why.
You see, refinancing comes with numerous costs. Moving before you can recoup these costs through lower payments means you’ll have wasted money and time in the process.
On the other hand, if you have no plans of moving in the near future, then refinancing makes a lot of sense.
Are You Paying PMI? Here’s the Deal
If you’re paying private mortgage insurance and your house’s value has increased to the point that you now have 20% in equity, then refinancing makes sense. First, you’ll benefit from low rates. Second, you’ll eliminate PMI monthly payments which fall between 0.5 and 1 percent annually.
For example, assume you have a $200,000 mortgage with a 1 percent PMI payment. Refinancing will save you up to $2,000 annually. This is $167 every month.
If you’re an FHA loan borrower, then there are benefits to reap if you choose to refinance the nation 21 loans for bad credit into a conventional one. Often, FHA has cheaper than PMI rates, and qualified borrowers can save some money by either reducing or eliminating the FHA PMI altogether and secure lower rates.
A divorced couple can also take advantage of falling rates. You can eliminate the ex-spouse from the mortgage if you feel both your payment history and credit score are solid enough to allow for solo refinancing.
The Cost of Refinancing
Again, as mentioned in this article, refinancing comes with a lot of costs. Thus, it’s vital to take the time to know how much money refinancing will save you. Before that, the main focus should be much the process will cost you.
To secure a lower rate, you’ll have to incur closing costs, again. This includes attorney, appraisal, bank fees, etc. In total, these costs will set you back at least 2 percent of the mortgage balance, but this will vary.
For example, for a $300,000 mortgage, you’ll need about $6,000 to cover the fees. How long will it take you to recover this amount with the refi mortgage? Typically, you want to get back the money in less than five years. Anything longer than that will defeat the purpose of refinancing.
Consider this example. Let’s say you have a $400,000 mortgage payable in 30 years at a rate of 4.5%. However, you’ve already repaid $80,000 within 10 years which means you have another 20 years left. For this, you’ll have to pay $2,026 every month for the remaining $320,000.
If you can refinance the mortgage at 3.75% for the remaining period, you’ll pay a reduced monthly installment of $1,897. This is $130 in savings each month. Therefore, you’ll only need a little under 4 years to get back the $6,000 you paid to refinance.
In addition, this will save you an extra $129 every month for the next 16 years after recouping the costs. This will translate to a total of $25,000 in savings for the duration of the mortgage.
What Will You do with the Savings?
Refinancing can help you save a lot of money, which is great. However, what are your intentions with these savings? Are you going to invest the money, or will you deplete it financing an expensive lifestyle?
It doesn’t make sense at all to spend your money and time refinancing a mortgage only for you to waste the saved money on meaningless spending. Sit down and think about the future. Look at the bigger picture here. Have you achieved your financial dreams yet?
If you haven’t, then the savings resulting from this move should help you make profitable investments, which will better your financial life.
You can also put the money into a retirement savings account or even take your family on a vacation. Regardless of what you want to do with the money, having a plan is always great to help you get the most of it.
Home mortgages are a great way to fund a new home purchase. The dropping market rates present an opportunity for millions of homeowners to save money through refinancing.
While this may seem like a good time to refinance a mortgage, it’s important to go through the pointers highlighted in this article to find out whether refinancing will save you money or not.