With mortgage rates back down to the bottom again, homeowners struggle to refinance and cut their monthly payments. often hundreds of dollars…
If you’re thinking of joining the rush to retool, personal finance author and TV host Seuss Orman wants you to stop and take a deep breath – so you don’t get it wrong.
“It drives me crazy that most homeowners make a huge refinancing mistake,” she says.
According to Orman, this is a blunder that can easily burden you with much higher interest costs, even if you manage to get a mortgage rate that your friends will envy.
‘So very wrong’
The average 30-year fixed mortgage rate has fallen below 3% again, and homeowners who were hesitant last time refuse to lose sight. Earlier this month, refinancing activity surged to highest level since February…
Still, Orman says that many enthusiastic refinancing organizations make the costly mistake of automatically rolling over to another 30-year mortgage, even if they’ve been repaying an existing 30-year loan for years.
“This is very wrong,” the personal finance guru writes on his blog.
Let’s say you paid off your original loan for 14 years and then took out a new 30-year mortgage. “Of course, a new mortgage at a lower interest rate, but you just extended the mortgage on this home to 44 years!” she said.
When 30-year refinancing might make sense
IN Fixed rate mortgage for 30 years is the most popular mortgage loan in America, so it can naturally be the perfect option for homeowners looking to swap their existing mortgages for a better deal.
And this is an obvious choice if your mortgage is relatively new. At the beginning of last year, the average 30-year mortgage rate was around 3.75%.
Mortgage data company Black Knight estimates that at current rates, 15.1 million homeowners can save an average of $ 298 per month through refinancing.
But like many experts, Orman usually recommends refinancing a new loan for a shorter period.
“My rule of thumb for refinancing is that you should never extend the total payback period over 30 years,” she says in blog…
Let’s say you actually still hold a 30-year loan that you took out 14 years ago in the summer of 2007.
At that time, rates averaged a low 6.4%. (Seriously, you should have refinanced earlier.) Let’s say your mortgage was originally $ 250,000; now you will have about $ 188,000 on your balance sheet.
Why consider refinancing into a shorter-term loan
According to the Mortgage Bankers’ Association, rates on 30-year fixed home loans now average just 2.99%.
If you refinance that $ 188,000 balance on a new 30-year mortgage at 2.99% and stay with the loan for the entire term, the lifetime interest rate will be higher. USD 97,000…
Instead, you can opt to refinance for 15 years. Fifteen-year mortgages have lower interest rates than 30-year loans: the average for 15-year-olds is currently only 2.35%.
With a 15-year mortgage of $ 188,000 at 2.35%, you will pay approximately USD 35,200 during the term of the loan. That’s $ 61,800 less than the 30-year refinancing.
But many refinancing institutions do not opt for a 15-year loan because they do not think they can afford higher repayments:
The monthly payment (principal plus interest) on a 30 year refi of $ 188,000 at 2.99% is about USD 790…
Monthly payment (principal plus interest) for 15-year refi in the amount of USD 188,000 at 2.35% is USD 1240…
But Orman says 15-year mortgage rates have been so low in recent years “that you might be able to refinance the remaining balance and you end up with a payment that is not much different from what you paid in your 30 years. “
And in our example, this is true:
The monthly payment (principal plus interest) on the original 30-year mortgage of $ 250,000 at 6.4% was USD 1,563… The new 15-year loan costs about $ 320 less per month.
How to choose
Whichever type of mortgage you choose to refinance, you need to be sure to stay at home for several years.
“There is no free refinancing,” says Orman. “You will either pay the closing costs, which can be a few percentage points of the value of your loan, or you raise your interest rate.”
According to most recent data from ClosingCorp. You won’t want to move until the savings from your new, lower mortgage rate pay off the final costs – and then some others.
If you think you are in the house for a long time, refinancing into a 15-year mortgage can be a smart choice if you can handle the payments. Your interest rate will be lower and over time you will pay tens of thousands of dollars less in interest.
Another 30-year mortgage with lower monthly costs might be a smart move if you’re unlikely to stay in your home for long. If you can leave within a few years, what does it matter if you have a loan for 30 or 15 years?
Always take a closer look at it before settling on any loan. Get mortgage offers from multiple lenders to find the best price available in your area and for the person with your credit score… Don’t assume that the very first lender you come across will offer you the lowest rate.
Be sure to apply your purchase comparison skills when you receive renewal notice from your insurance company. You can easily get several offers for home insurance and compare prices to find what works best for you.
This article provides information only and should not be construed as advice. Provided without warranty of any kind.