Recommendations:
- Check your break-even point on a refinance
- Refinance (if it makes sense) while rates are low
Annual Savings Potential: Can be thousands of dollars/year
Discussion Mortgage rates are at levels that haven’t been seen in 40 years or more. The weak economy, coupled with government efforts to push rates down to make housing more attractive, is making this a once-in-a-generation opportunity for those with good credit to refinance. The first thing to look at, of course, is whether current mortgage rates are lower than what you are currently paying. If not, then there’s nothing to see here (unless you are on a variable rate that may spike up in the not-too-distant future).
For most people, current rates provide an opportunity to save tens of thousands in interest over the life of a mortgage. However, because there are front-loaded costs associated with most mortgage financing, it isn’t as simple as comparing rate A to rate B. At a high level, here are the two approaches you can take:
- If you plan on staying in the home for many years, look for the lowest interest rate option offered by your bank. You may have several options, with lower rates coming with more origination costs (points). You’ll pay more today, and your break-even period will be longer but you’ll end up paying the least interest in the long run
- If you don’t know how long you’ll stay in the home, or want to minimize out-of-pocket costs at closing, shop for the lowest rate that includes 0% origination fee. In this scenario, your break-even is sooner, although your monthly payment will be a bit higher and, if you end up in the home for a long time, you’ll pay more interest.
Another suggestion to minimize out-of-pocket costs at closing is to have them rolled into the loan. This will increase the principal balance (amount you are borrowing), slightly increasing your monthly payments.
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