Refinancing Your Mortgage: Understanding Potential Savings
Refinancing your mortgage can save you significant money, even in today’s fluctuating mortgage rate environment. Understanding how refinancing works and how current rates affect your mortgage payments is essential. Refinancing can lower your monthly payments, shorten your loan term, or access your home equity. This blog will provide detailed information on current mortgage rates, why refinancing can be beneficial, and specific strategies to secure the best rates available.
Current Mortgage Rate Situation
COVID-19 initially pushed mortgage interest rates to record lows. Rates hit a historic 2.67% in December 2020. However, the average 30-year fixed mortgage rate has since increased. As of now, it’s around 7.5%. While this is higher than the pandemic lows, it’s still lower compared to rates in the 80s, which ranged from 10% to 18%. Despite rising real estate costs, today’s mortgage rates remain relatively favorable. More about current mortgage rates here.
Why Consider Refinancing Your Mortgage Now?
Even with the current rates, refinancing your mortgage can offer significant savings. Let’s explore why and how you can benefit.
- Reduce Your Monthly Payments
Refinancing your mortgage can lower your monthly payments. For example, if your original mortgage was $600,000 at a 7.5% interest rate, your monthly payment would be about $4,197. By refinancing to a 6.5% interest rate, your new monthly payment would be about $3,790. This results in monthly savings of $407, or $4,884 annually.
If you had been paying your mortgage for a year, the principal balance would have decreased slightly. Let’s assume the remaining balance after one year is approximately $593,000. Refinancing this amount at a 6.5% interest rate over the remaining 29 years would lower your new monthly payment to about $3,753. This adjustment increases your monthly savings to $444, or $5,328 annually.
- Shorten Your Loan Term
Refinancing can shorten your loan term, reducing the total interest paid. For instance, if you refinance a $500,000 mortgage from a 30-year term at 7% to a 15-year term at 6%, your monthly payment would increase from $3,327 to $4,219. However, you save on interest in the long run. Over the life of the loan, you’d save approximately $416,500 in interest.
- Access Home Equity
Cash-out refinancing allows you to access your home equity. If your home value has increased, you can refinance your mortgage to tap into that equity for home improvements or other investments. For instance, if your home’s value has increased from $1,000,000 to $1,200,000, you could refinance your mortgage to access $200,000 for other financial goals.
Steps to Secure the Lowest Mortgage Rate
Securing the lowest rate when refinancing your mortgage involves several strategies.
- Get Informed
Do your research, also make sure you don’t fall for scams. Check also some guidance from regulatory bodies of the USA and the mortgage industry. However, let experienced officers help you with calculations. Let us know if you have a scenario.
- Improve Your Credit Score
A higher credit score can secure a lower rate. Pay off debt, avoid new credit inquiries, and maintain a good payment history. These steps can significantly impact your mortgage rate.
- Consider Points and Fees
Evaluate the cost of points and fees when refinancing your mortgage. Sometimes paying upfront points can lower your rate, offering long-term savings. Understand all costs involved to make an informed decision.
- Lock in Your Rate
Once you find a favorable rate, lock it in. Mortgage rates can fluctuate, so securing a rate lock ensures you get the agreed rate even if rates rise.
Is Refinancing Your Mortgage Right for You?
Refinancing your mortgage depends on your financial goals. Assess your current rate, loan term, and financial situation. Refinancing can provide substantial benefits if it aligns with your long-term goals. In conclusion, refinancing your mortgage can offer significant savings, even with today’s rates. Evaluate your options, and make informed decisions to get the best deal possible.
Disclaimer: This information is provided for general informational purposes only and should not be considered financial advice. Rates and terms are subject to change and may vary based on individual circumstances. Always consult with a licensed mortgage professional to understand all terms and conditions before refinancing your mortgage. Ability to refinance is contingent on qualifying factors such as credit score, income and debt.