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.

Most Popular

Are You Rich? The Answer May Surprise You
personal finance

Are You Rich? The Answer May Surprise You

Whether you are considered rich depends on how you measure it – and the bar for that is changing. Have a look at the numbers that define who's wealthy…
August 12, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Save More on Green Home Improvements Under the Inflation Reduction Act
Tax Breaks

Save More on Green Home Improvements Under the Inflation Reduction Act

Tax credits for energy-efficient home improvements are extended and expanded by the Inflation Reduction Act.
August 19, 2022

Recommended

The 11 Most Expensive Cities in the U.S.
real estate

The 11 Most Expensive Cities in the U.S.

From metro areas on both coasts to the middle of the Pacific Ocean, these are the priciest cities in the U.S. to call home.
August 9, 2022
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
August 7, 2022
Looking to Relocate? Plan for Climate Change
buying a home

Looking to Relocate? Plan for Climate Change

Extreme weather events are on the rise. If you’re moving, make sure your new home is protected from climate change disasters.
July 28, 2022
A Healthy Condo Has a Flush Reserve Fund
Smart Buying

A Healthy Condo Has a Flush Reserve Fund

Reserve funds for a third of homeowner and condo associations have insufficient cash, experts say. Here are some cautionary steps you should take.
July 14, 2022