Interest Rates Drop Again, Is It Time To Refinance?

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Interest rates are at unbelievable lows right now and many property owners are taking of advantage by refinancing their current mortgages.

Have you thought about refinancing? Will it help your financial position at this time?

Lenders charge a fee for you to refinance your loan. These fees are known as “points”.  Points are upfront interest paid to the lender, calculated on the amount of money you borrow.

1 point = 1% of your borrowed money.

If you had a loan of $450,000 and you were going to be charged 1 point to refinance, that would equate to $4,500.

1% of $450,000 = $4,500

If you had a $450,000 mortgage, at a current rate of 6%, your monthly payment would be $2698.  If your lender was going to charge you 1.5 points to refinance to the current market rate of 3.5%, it would cost you $6,750.  Once completed, your new monthly payment would drop from $2698 to $2021, a decrease of $677! Wow!

Your monthly savings would be so great, that you by your 10th payment at your lower interest rate, you will have recouped the $6750 it originally cost you to get the lower interest rate, a wise move on your part!

While the refinance did wonders for you, that isn’t always the case. Take the scenario with your neighbor.

Your neighbor can’t believe how much you are saving and wants to refinance as well.

Currently they are paying 4% on their $450,000 mortgage, their monthly payment is $2,148.

Their lender is going to charge them a fee of 1.5 points or $4,500 to refinance to the market rate of 3.5%. After paying the $4,500, their monthly payment has decreased from $2,148 to $2,021, a monthly savings of $127. Realize here that they have just come out of pocket $4500 to save $127 a month. This isn’t anywhere close to the dramatic change you saw in your payment.

By the 36th payment (36 x $127 =$4,572) the monthly saving of $127 will equal the $4500 originally paid to secure the lower interest rate. In essence, it took them 3 years before realizing any savings from their new, lower rate. Possibly not the best use of their money.

A refinance includes an appraisal of the property, and a thorough examination of the borrower’s credit scores and financial strength. Think of it as going through the loan process all over again. As property values have decreased, appraisal value has been problematic at times, although new government regulations have tried to ease this.

Your lender will be able to advise you accordingly, just be sure you crunch the numbers and examine the many aspects a refinance presents.

Best of luck!

By |2012-06-05T17:44:21+00:00June 5th, 2012|Finance & Mortgage Information, General, Sellers|0 Comments

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