Mortgage rates are going up and some homeowners who were thinking about refinancing this summer may have missed the boat.
Indeed, there are four good reasons to consider refinancing now:
- You're paying 7.5% or more on any kind of mortgage.
- You have an ARM that has recently reset or is going to over the next year. This is especially important if you've been enjoying an introductory rate of 4% or 5% and you'll soon be paying 7.5%, 8.5% or more. Just be sure either you don't have a pre-payment penalty clause in your mortgage, or it's one that you can handle.
- You have significant equity in your home and can use a cash-out refinancing to make improvements or payoff high-interest credit card bills. This is still a cheaper way to get that money than a home equity loan or line of credit.
- You can afford higher monthly payments. Swapping a 30-year loan for a 15-year loan will save you a pile of money in the long-term.
Although rates are important, the key to a successful refinancing is to be sure that you stay in the house long enough to recover the cost of a new loan.
If, for example, refinancing cuts your payments by $100 a month, but you paid $2,000 in closing costs to obtain the new loan, you would have to live in that house for 20 months before you actually begin saving.
With that in mind, take a look at your mortgage and see if refinancing can:
Lower your monthly payment.
If, for example, you have a mortgage for $165,000 at 7.5%, you're paying about $1,154 in principal and interest each month. Refinance to 6.5% and you'd be paying $1,043 a month. That's $1,332 a year less, or $6,660 less over five years.
Now subtract the cost of the refinancing, let's say $1,000, and you'd still save $332 in the first year and $5,660 over five years.
Consider the same loan with only three-quarters of a point rate reduction. A 30-year loan at 6.75% would cost $1,070 a month in principal and interest, saving $84 a month or $1,008 a year.
If you can get a new loan cheaply enough-fees of $1,000 or less -- that's still a good deal. You would probably save enough to pay off a credit card or do some much needed home repairs.
Get you out of an increasingly expensive adjustable-rate mortgage.
Many borrowers over the past few years were given artificially low introductory or "teaser" rates on adjustable-rate mortgages. If that rate is about to end -- or has already ended and begun to rise -- you should refinance.
While that initial rate was probably less than you could get on a fixed-rate loan, the new rates will be higher.
Although you might want to refinance to a 30-year fixed-rate loan, the lower your credit score the more difficult it will be for you to qualify. Borrowers with credit scores below 620, who must apply for high-cost subprime loans, will have the toughest time.
They're also demanding that you have at least some equity in the home -- a huge problem for borrowers who put no money down and financed the entire purchase with negative amortization loans that allowed their debt to grow faster than their homes appreciated in value.
When you refinance avoid especially dangerous loans such as option ARMs or interest-only mortgages, no matter how cheap the initial "teaser rate" or payments might be.
Click here for more advice on what to do if your mortgage payments are going up.
Free up cash from your home.
Used responsibly, it is often a less expensive way to tap into the equity in your home than by getting a traditional home equity loan or line of credit, which will cost you in the neighborhood of 7.75% to 8.25% right now. But spending that money on home repairs, credit card debt, unexpected medical bills or your kid's college tuition makes good financial sense.
Here's what we consider to be the six best and five worst ways to spend the equity from your home.
Reduce your interest payments.
But you'll ultimately save money two ways:
- The shorter the loan, the lower the interest rate. While the average rate for a 30-year mortgage is right around 6.5%, it's only 6% for a 15-year loan. That will save about $40 a month in interest for every $100,000 that you borrowed.
- The faster you payoff the principal, the less interest you'll pay over the life of the loan. Instead of spending $127,544 for every $100,000 you borrow, your total interest costs on a 15-year loan would be less than $51,900.
But only do this if you are in the first 10 years of your 30-year loan, or if the 15-year rate is extremely low. Have your lender run some numbers on how much you would save in interest before you decide.
If you can't swing the 15-year payments, check the numbers on a 20-year mortgage.
By Carolyn Siegel
