With 30-year mortgage rates below 3% and the lowest in months, homeowners rush to refinance their loans while they can – and cut their monthly payments. often hundreds of dollars…
If you’re thinking of joining a new quest for fix, 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’
Mortgage rates fell to a record low in early 2021 and then surged as COVID vaccines raised hopes for a strong economic recovery. Rates have dropped lately back to the cheap zone…
According to the company, in the first quarter of this year, about 2.55 million home mortgages were refinanced – 113% more than in the same period a year earlier. Attom Data Solutions… In the week ending June 11, refinancing applications jumped 5.5% as rates fell below 3%, according to the Mortgage Bankers Association.
Orman says most of the new refiners are likely making the costly mistake of automatically getting another 30-year mortgage, even if they’ve paid off their existing 30-year loan over several years.
“This is very wrong,” she writes on her blog.
The personal finance guru says that 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 payments on this house 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 it’s an obvious choice if your current mortgage is fairly new. More than 14 million homeowners with 30-year mortgages can now save an average of $ 287 by upgrading to another 30-year loan at today’s low rates, according to mortgage and technology company Black Knight.
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 the time, the average rates were around 6.75%. (Seriously, you should have refinanced earlier.) Let’s say your mortgage was originally $ 250,000; now you will have about $ 190,000 on your balance sheet.
Why consider refinancing into a shorter-term loan
According to mortgage company Freddie Mac, rates on 30-year fixed home loans are now averaging just 2.93%. This is the lowest since mid-February.
If you refinanced your $ 190,000 balance on a new 30-year mortgage at 2.93% and stayed for the full term, the lifetime interest rate would be about USD 96,000…
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 just 2.24%.
With a 15-year $ 190,000 mortgage at 2.24%, you will pay approximately USD 34,000 during the term of the loan. That’s $ 62,000 less than the 30-year refinancing.
Many refinancing organizations do not opt for a 15-year loan because they do not think they can afford higher repayments:
Monthly payment (principal plus interest) on a 30 year refi of $ 188,000 at 2.87% is about USD 794…
The monthly payment (principal plus interest) for a 15-year refi in the amount of USD 190,000 at 2.24% is USD 1,244…
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 6.75% was USD 1,622… The new 15-year loan costs $ 378 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 cost of your loan, or you raise your interest rate.”
According to ClosingCorp, the average cost to close a mortgage for refinancing is around $ 3,400. 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, provided 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 keep an eye on it before settling on any loan. Collect 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 go to 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.