You may be kicking yourself for missing out on historically low mortgage refinance rates in late 2012 and early 2013. Well, stop second-guessing yourself and reassess your mortgage situation – there may still be a savings opportunity.
Consider that interest rates are just now climbing back to 2011 levels. They are likely to continue a slow rise in 2014, but if you wait for interest rates to dip again, you may be kicking yourself again.
Here are some scenarios where refinancing still makes sense:
- Adjustable Rate Mortgage (ARM) with Impending Adjustment – If you have a hybrid ARM nearing the adjustable period, or a traditional ARM that projects significant future adjustment, it is worth checking out current options. After five years or so, your low initial interest rate probably does not look as good.
- Lower Fixed Rate – If you are intending to stay in the home for a long time and still owe a significant amount at a higher interest rate, refinancing may provide savings on total interest costs as well as lowering monthly payments.
- Improved Credit Score – If your credit score has improved significantly since your original loan, you may qualify for a better rate in addition to general interest rate changes.
To determine if refi savings are still available for your situation, compare the savings of the new fixed interest rate to the costs associated with refinancing, and where your break-even points are. There are many online refinancing calculators to help you – here's an example with an online calculator that calculates interest monthly.
Let's say you still owe $200,000 on your mortgage with a monthly payment of $2,450 and a 6% interest rate. Assume financed closing costs are 2% of the mortgage balance, or $4,000. If you can refinance for 10 years at 4.6%, your monthly payment will drop to $2,124.07, you will recoup your closing costs in 21 months, and you will reduce your overall interest paid by $6,771.32 – a net savings of $2,771.32.
Change the closing costs to 4% ($8,000) and your monthly payments are reduced to $2,165.72, saving $5,773 in interest – but that doesn't cover your closing costs.
If we return to 2% closing costs and change the interest rate to find the point where the savings in interest are exactly balanced by the closing costs (the break-even interest rate), it's just under 5.8%.
If we change the term to 15 years instead of 10, the break-even interest rate is 7.4%
If we change the remaining principal to $100,000 and keep the closing costs at 2% or $2,000, the break-even interest rate becomes a whopping 11.5%! This illustrates an important point – you do not want to refinance smaller amounts of remaining principal, because you are now paying down more principal than interest. If you refinance, you're back to dealing with interest again.
If we decided that we could find the refinancing term that would keep the same monthly payments, that term would be almost 8.3 years, saving $16,665 in interest for a net savings of $12,665 over our closing costs.
This example illustrates how you can use an online calculator to determine whether you will save money (in lower monthly payments, greater savings over time, or both). Get a feel for what affects your situation the most and then you can speak to your lender with confidence – you know what terms work for you, when rates are too high, and what closing costs you can handle. Don't wait until rates rise again, or you'll have to get out your kicking boots.