You had to be living under a rock over the past few years to avoid hearing about low interest rates. A global financial crisis and central bank policies drove rates to their lowest levels in recorded history. This created a strong incentive for Americans to refinance their mortgages, reaping monthly savings from lower payments. Interest rates are still at historic lows now, but knowing when to refinance isn’t always a clear decision, especially when borrowers don’t even know their current mortgage rates.
It’s impossible to know how much money refinancing can save you without knowing the current interest rate on your mortgage. According to a new survey from Bankrate.com, 35% of mortgage borrowers aren’t completely sure what interest rate they are paying. That includes one in seven mortgage holders who are “not too confident,” “not at all confident,” or simply have no clue. Ignorance may be bliss, but it can also be quite expensive.
“Your mortgage rate is one of the most important numbers in your financial life, and there’s a good chance that one of your neighbors has no idea regarding how much he or she is paying,” said Holden Lewis, a senior mortgage analyst at Bankrate.com, in a press release. “Given how far mortgage rates have fallen, these people could be missing substantial opportunities to save money by refinancing.”
Borrowers may be leaving thousands of dollars on the table each year by not taking advantage of lower rates. The average fixed rate on a 30-year mortgage is around 3.8%. In comparison, it was well above 6% as recently as 2008. Bankrate.com estimates that a homeowner refinancing a $200,000 loan from 6% to 3.8% will save $267 per month.
When is the right time to refinance in order to save money? If you plan to stay in the same house for at least a couple of years, the general rule of thumb is to refinance as long as you can lower your interest rate by 1 percentage point or more. Staying in the house for at least a couple years will most likely allow you to recover the closing costs of refinancing your mortgage, which often run in the neighborhood of $3,000 to $4,000, depending on your loan amount. If you intend to stay in the same house for a longer period of time, refinancing becomes an attractive option even sooner.
To calculate your break-even point, divide the estimated total cost of your refinance by the monthly savings on your loan payment. The result is the number of months that would be required to recoup the cost. The longer you stay in the house past the break-even point, the more money you stand to save from refinancing into a lower interest rate.
Refinancing can be a headache in today’s banking environment, but it’s one of the most significant methods for homeowners to improve their monthly cash flow. Start by contacting your current mortgage lender to see what rates are available to you, and shop around with online services such as LendingTree to ensure you are receiving a competitive rate. Be ready to provide documents such as pay stubs, tax returns, and bank statements to lenders. You should also make sure your credit report is healthy and error-free. Most important, remember that saving money on your mortgage takes action and time. A refinance isn’t going to happen by itself.
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