If you’ve been straddling the fence on whether or not to refinance your residential mortgage, it’s not too late to lock in historically low interest rates on a fixed-rate loan.
In mid-January, the rates for a 30-year fixed mortgage were about 5 percent.
“All indications are that rates are going up this year, so now is a great time to take advantage of the rates we have,” said
Alan Perry, a mortgage consultant at CoastalStates Bank.
Before you beeline it to the bank, however, first consider is it’s worth your while.
“If you’re going to refinance, look at overall closing costs versus what you are saving and how long you plan to stay in the home,” said Fran McKinney, mortgage specialist at Bank Meridian.
Qualified borrowers can expect to pay $1,500 to $2,500 in closing costs on a conforming loan of $417,000 or less. It may take two to three years before you reach the “break-even point” when the savings on your new monthly mortgage payments cover the cost of refinancing the loan. If you expect to sell your house before that point, it doesn’t pay to refinance.
Closing costs can be considerably higher for borrowers who don’t meet today’s stricter mortgage requirements. Most reputable lenders are looking for a credit score of 740 or higher. The loan-to-value ratio of your property — that is the mortgage amount compared to the appraised value of the house — will also affect the price of refinancing.
“If you have a loan–to-value greater than 70 percent and a credit score less than 720, you’re going to get hit with a fee,” said Torrey Glass, senior loan officer with Mortgage Network. “The higher your credit score and the lower the loan-to-value ratio, the less the loan is going to cost you.”
Homeowners looking for bigger savings can “buy down” the interest rate by paying points up front. It will cost approximately 1 percent of the loan amount to reduce the interest rate by ¼ to 3/8 percent. That means, for example, that you could pay an additional $2,000 to lower your rate from 5.25 to 5 percent on a 30-year fixed mortgage of $200,000 for a savings of $30 a month, or $11,075 over the life of the loan.
Lowering your payments isn’t the only reason to refinance. Homeowners with adjustable rate mortgages or balloon loans who want the security of a fixed rate also are prime candidates for refinancing.
Low interest rates also offer an opportunity for homeowners.
“I’ve seen people looking to purchase who have good equity in their property and then buy a new property with some of that equity,” said Perry.
Overall, the current interest rates make it a great time to consider refinancing or buying a second property.
“This is very, very inexpensive money,” said Glass. “A couple of years from now, we’re going to look back and realize how attractive these interest rates really are.”
The best piece of advice? Use someone local, said McKinney.
“So many people get trapped in the online offers, and by the time you get into them, it’s too late,” she said. “People can be taken advantage of online.”
