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It's Not Just for Low Rates

Posted by:  Chip Poli
2013-01-02 10:49:51

Mortgage rates have been scraping the historical bottom for over a year now and if the Fed continues its $40 billion buying spree each month itís possible rates will not only remain low but in fact fall a bit more. When interest rates were at seven percent a few years ago then dropped to five percent there was a wave of refinance activity. As rates continued to fall over the past two years more and more borrowers found that refinancing into a lower rate was a good idea for them.

But refinancing doesnít always have to be for lower rates.

A refinance is a brand new loan. Itís not an adjustment or modification of an existing mortgage but a brand spanking new one. And with a new loan there is a loan application and documentation requirements just as with a mortgage used to purchase real estate. There can be closing costs and not a small amount of dedication on your part required when refinancing. Yes, there are certain government guaranteed refinance programs that can ďstreamlineĒ a refinance but there is still some work involved.

That means a refinance does take some consideration on your part. Is a refinance worth it? The first way to determine if a refinance works in your favor is finding out how much lower your monthly payment will be by locking in a new low rate. If your monthly payment drops by $10 is a refinance worth it? $50 per month? $200? Whether or not a refinance will work in your best interest is something you should discuss with your loan officer but there are other reasons to refinance a mortgage other than lowering a payment.

Many today are refinancing their mortgage less due to a rate and more to change the loan term.

For example, if a 30 year fixed rate of 5.00 percent on a $300,000 loan has a payment of $1,610 and rates drop to 3.50 percent, the new monthly payment would be $1,347 for a savings of $263 per month. Such a drop in payment deserves serious consideration.

But what if that same borrower decided to refinance into a 15 year fixed rate mortgage at 3.00 percent, what would the payment be? $2,071. Why would someone refinance a loan if the payment goes up? To save on long term interest. Letís look at the impact changing the term has on a $300,000 loan.

When to Refinance

After ten years, the borrower with a 30 year fixed rate at 3.50 percent will save $263 per month, or $31,560 and pay a total of $83,528 in interest to the lender.

Under that same scenario but refinancing into a 15 year fixed rate at 3.00 percent, the monthly payment rises to $2,071, or $461 more compared to the 5.00 percent rate and paying $55,126 in interest over ten years. The monthly payment for the 15 year fixed rate is higher but the borrower saves $28,402 in interest. And remember, there are also 10, 20 and 25 year fixed rate loans waiting for you as well.

Changing the term on a mortgage should be just as much a consideration as a lower monthly payment. And in fact, saving thousands of dollarsí worth of interest expense can buy a lot of other things such as a new car, a college education or a trip around the world. If youíre looking at refinancing your mortgage, look at all your options.

Mortgage Rates mentioned are for illustration purposes only and not a rate quote.

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