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While the current mortgage rates are only just above the all-time low of January, they are still consistently below historical price developments. They can change on a daily basis, but as long as they stay low, they still provide home buyers and homeowners with an opportunity to benefit from a purchase or refinance.
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Last week’s average mortgage rate is based on mortgage rate information submitted to Bankrate.com by national lenders, which, like NextAdvisor, is owned by Red Ventures.
For home buyers, using lower rates can help offset this rising home prices. But recent hikes in house prices may limit the impact of low interest rates. The more you spend on a home, the higher the down payment and the loan amount. With a larger loan, you end up paying more interest and a higher monthly rate, which could quickly wipe out the savings you would otherwise have made at a lower interest rate.
For many existing homeowners, that is low refinancing rates provide good opportunity, Save money in interest in the long term. However, the refinancing needs to make financial sense in relation to your personal goals. Here are some of the benefits of refinancing and how to determine if it’s right for you:
How Refinancing Can Be Good For Homeowners
In some cases, refinancing can lower your monthly payment and save you thousands of dollars in interest. Consider this example that shows how it can make sense for a homeowner:
- Home purchase value: $ 350,000
- 10% Down Payment: $ 35,000
- 30 year mortgage
- With an interest rate of 4.25% on the $ 315,000 loan (after down payment)
If you’ve been paying the loan for three years, you have a loan balance of approximately $ 298,000, according to NextAdvisor Mortgage calculator.
By taking out a new 3% 30 year refinancing loan, you would cut your monthly payment by $ 293 and save nearly $ 50,000 in interest.
|Credit balance||Interest rate||Monthly capital and interest||Total remaining interest|
|Current loan||$ 298,000||4.25%||$ 1,549||$ 203,931|
|Refinance credit||$ 298,000||3.00%||$ 1,256||$ 154,381|
|difference||–||1.25%||$ 293||$ 49,550|
What you should consider before refinancing
Mortgage rates are historically lowwhich makes it tempting to jump into a refinance. However, this may not be the best step depending on your situation and financial goals. Refinancing is not free and you have to pay Closing costs. Depending on how much you save on your new plan, the closing costs may outweigh the benefits.
Here are three questions to ask yourself before refinancing:
1. When will you break even?
The break-even point indicates how long it will take for the monthly savings from a refinancing to cover the closing costs. Closing costs typically range from 3% to 6% of your loan amount and include fees for valuation, title, and lender procurement.
To ensure that the potential savings from a refinance outweigh the cost of the close, first identify the break-even period.
- Use of NextAdvisor refinancing calculator, enter the following information:
- Current property value
- Current monthly payment
- Credit balance
- Remaining years of your loan
- Use the drop-down menu to select a mortgage refinancing term (30, 15, 20 or 10 year term).
- The calculator shows you how much you could save monthly with a refinancing.
- The closing costs can be between 3% and 6% of the total loan. Example: 4% of a $ 200,000 loan would mean a $ 8,000 closing cost.
- The break-even schedule: use the estimate of the total closing cost and divide it by the monthly savings using this equation:
- Closing costs / monthly savings = break-even period (in months)
- Example: $ 8,000 closing cost / $ 250 monthly savings = 32 months. In this example, you would break even in 32 months – or 2.6 years.
2. How long do you plan to stay home?
It is important to find out how long you plan to stay in your current home before refinancing. If you move or sell your home before the profitability period is up, the funds spent on refinancing outweigh the savings. Consider your long-term plans:
- How long do you plan to stay in your current job?
- Would you like to live somewhere else?
- Do you think you might be moving for other reasons?
It may not make sense to pay the fees associated with refinancing if you plan to leave before saving up.
3. Have you already refinanced and when?
The same rules apply to multiple refinancing. If you’ve already refinanced, how long has it been? Even if there is no real limit to the number of refinancing, you should first wait until the break-even period for your last refinancing has expired. If you overlap a new refinance beyond the existing break-even period, the savings may not be paid out. There may also be rules for lenders preventing you from Refinancing too early after your last.