real estate

Refinancing Your Home May Still Make Sense

Even a slightly lower rate could save you thousands of dollars a year.

Mortgage rates continue to hover at levels that confound the forecasters. Recently, the average rate for a 30-year fixed-rate mortgage fell to about 3.7%, its lowest point in a year. When rates dip, it's worth exploring whether refinancing can save you money. You can benefit even if you don't cut your rate by a full percentage point—a rule of thumb you can safely ignore.

The larger your loan balance, the more money you'll save. Say you got a $300,000 mortgage with a 30-year fixed rate of 4.5% five years ago. If you refinance to a 30-year rate of 3.7%, you would cut your monthly payment by $260, to $1,260, and pay for your total closing costs (estimated at 2% of the loan balance) in 21 months.

To pay off your mortgage more quickly—say, to eliminate it before you retire—consider refinancing to a 15-year term. The 15-year rate was recently 3.1%, according to HSH.com, which surveys hundreds of mortgage lenders weekly. The lower rate will help to offset the higher payment. In the example above, if you took a 15-year fixed rate of 3.1%, your monthly payment would rise by $383, to $1,903, but you’d be mortgage-free 15 years earlier and save $168,474 in interest. Another option: Ask lenders for a term equal to the remaining years of your existing mortgage.

If you have an adjustable-rate mortgage and your fixed-rate period will end soon—and you're not comfortable with a rate that adjusts annually—refinancing to a fixed rate may make sense if you can lower your monthly payment and if you plan to stay in your home long enough to recoup closing costs. But if you plan to move within the next five to seven years, you may benefit by refinancing to another ARM with a fixed-rate period that matches your expected tenure. The average rate on a 5/1 ARM was recently 2.9%.

Assume that the lender's origination fee, third-party costs (including the cost of an appraisal, title search and so on) and other closing costs will be 1.5% to 3% of the loan balance. If you have enough equity, you can add the closing costs to your loan balance and finance them. Or you could pay a higher interest rate in exchange for a lender credit that offsets closing costs. (You can calculate your payment, savings and break-even point with this refinancing calculator from HSH.com.)

Smart shopping. Check rates with the originator of your existing loan, your current loan servicer, bank or credit union, and an online lender such as Quicken. Another good source is www.mortgagemarvel.com, where many smaller banks and credit unions advertise their rates (you don't have to supply your contact information to get rate quotes). Rates and lender credits can change daily or even by midday, so try to call all prospective lenders the same morning.

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