When I was in the bank the other day, the teller was telling me about the new rates on a 30 year fixed rate mortgage and how I could save by refinancing my current loan. So, it got me thinking about my mortgage.
So, I thought that I would consider refinancing my mortgage. Here are a few things to consider when looking at a refinancing and what I look for when refinancing my mortgage.
My Current Interest Rate
When my wife and I bought our home in December 2008, we received a 30 year fixed rate mortgage from our bank of 5.325%. My current mortgage rate on a $191,000 loan is $1,063 per month plus taxes, insurance, and private mortgage insurance (PMI) which are separate to these calculations.
Savings From A Lower Interest Rate
The current 30 year fixed rate mortgage is approximately 3.43%. At that rate, a $191,000 loan would be $850 per month for 30 years. Since my wife and I have paid down our mortgage balance to $173,689, the monthly payment on that loan balance if we reset it to 30 years would be $773. You can find out how much you could possibly save by using a mortgage refinance calculator.
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A 26 Year vs 30 Year Fixed Rate Mortgage
One point that you may not have picked up on in the previous calculation is that the $773 monthly mortgage payment would reset the loan back to 30 years. This essentially adds four more years on the total amount that we would pay.
So, if we refinanced our mortgage for the same 26 years that we currently have left on our 30 year fixed rate mortgage at the current interest rates, we would be looking at a monthly mortgage payment of $842 plus taxes, insurance, and PMI for another year or two until we hit the magic 20% mark in home equity.
The Fees And Potentially Wrapping Them In
Like when you purchase a home with a mortgage, there are a host of fees and closing costs. The same is true when you refinance. You can expect to pay fees such as appraisal fee, origination fee, application fee, credit check fee, document processing fee and underwriting fee. You may even find that your lender may require you to pay points just like you did with your initial mortgage.
Of course, all of these fees can be expensive. Many mortgage lenders also offer the option to wrap these fees into your new loan which of course raises your monthly mortgage payment on your refinanced loan. It may pay to shop around for the best loan with the lowest interest rate and least amount of fees and points.
How Long Are You Staying In The Home?
Another big factor is how long you are going to stay in your home after you refinance. Let’s take a simple example to illustrate the point. Assume that it costs you $4,000 in closing costs and fees to refinance your home, and you wind up saving $200 per month in lower monthly mortgage payments after your refinance.
You will need to stay in your home for 20 months or almost two years in this example for the cost savings to payoff and for you to break even. This of course does not apply to me in my situation for the most part because the home in question is the one that my wife and I recently rented out when we became landlords earlier this year.
The Verdict On Refinancing Our Mortgage
So, what am I going to do? I might just have to call my mortgage banker later this week to see exactly what rate we can get and how much we can qualify to refinance for. It would be very cool to save $200 or more every month on our home especially since I see us keeping it as a rental property for years to come. I will keep you all updated as we decide whether or not to refinance.