I have a 30 year mortgage with a fixed rate of 5.5%. I’ve been paying on it for about ten years. I am seeing lots of ads with mortgage rates below 4%. I assume these really low rates will have unacceptable strings attached, like ballooning payments after a few years or adjustable rates or something like that.
Obviously I know that I could get a better rate. I have basically one concern, but I don’t know enough about finance to know if the concern is valid. First of all, if I got another 30 year loan, I would be paying off the house after my retirement, which I would like to avoid, obviously. Also (OK, two concerns, but they are related) when I first started paying the loan, I was always dismayed at how much of the payment was going to interest and how little was going to principal. My understanding, though, is that the longer I pay the more goes to principal. I don’t want to start over paying basically all interest again.
So are these valid concerns, and what are the pros and cons of refinancing?
I think your first stop is your local banks to start shopping around for mortgage rates. You’re in a pretty good position now - 5.5% isn’t a terrible rate, and I assume your house will be paid off at the end of it (and I also assume you can make extra payments and pay it off much quicker, too). It wouldn’t hurt to talk to some banks and get their rates and what kind of penalties you’d pay for early pay-out (if you re-finance with the same bank, they may waive these). Once you get hard numbers, you can start crunching them and see if a lower interest rate offsets a penalty pay-out. Like Finagle says, too, it doesn’t have to be another 30 year loan.
I don’t know how the reset for your principal versus interest payments would go with a re-finance - I’m curious about that myself.
All of your concerns can be countered by a decent mortgage lender if they listen to you and you communicate all of your concerns.
For instance, with good credit and 20% equity, Quicken Loans will write a 20 year fixed-rate note at 3.75% rate and 4.06% APR.
Closing fees under $2000 apply to the above product.
Missed the edit window: I’m showing that going from 5.5% to 4% would net in the vicinity of about a $100 per month per $100,000 of home value reduction in monthly payments. Make that call to a lender if you plan on staying in the house long-term, it could save you tens of thousands of dollars in interest.
Assuming you have decent credit, you should be able to get a ~4% or slightly lower rate with no strings attached. 15 year loan interest rates are significantly lower than that. Some places even offer 20-year. The only disadvantage is that you’ll have to pay a few thousand to get the loan. If you don’t want to pay out of pocket, they can roll the costs into the principal. That may sound counterproductive, but assuming in you don’t have plans to move any time soon, you’ll still end up paying less in the long run.
Chances are pretty good that you’ll save money by refinancing. If you talk to a broker or search online tools, you can plug in the numbers and it will give you a “break even point” - or how long you’d have to keep the new loan in order for it to be a money saver. If you’re planning to stay in your house at least that long, you will save money by refinancing.
Right now rates are at historic lows. So if you’re going to do it, I’d suggest acting quickly.
A few months ago I refinanced from 5.123% to 3.875%. The principal increased because we rolled in all the fees, but I paid nothing out of pocket and am saving a couple hundred dollars a month. It also extended my pay-off date by 2 years, but I can counteract that by paying a little more each month (but still less than what I had been paying)
First off, there’s nothing that says you can’t get a new 30 year, calculate the payments needed to pay it off at the same exact time as your current mortgage, and then just pay that amount each month.
Second of all, I’ve seen 15 year fixed mortgage rates at 3.5%, which is a pretty huge difference. I would plug in the exact numbers and see how much your payment will change. We can help with the math if you tell us how far into your current mortgage you are, and what percentage of the principal you have remaining.
Just to illustrate, let’s say your original loan was for $200k at 5.5%, corresponding to a monthly payment of $1136. If you were 13 years in (with 17 years to go) you’d still have $150k left to pay off. Refinancing that to 15-year fixed at 3.5% would both lower your payment (now only $1072) and shorten the time left on your mortgage by two years.
If you’re not as far into the mortgage, the payment on the 15-year may be higher than you want, but it’s definitely worth running the numbers.
For every $100,000 owed you would save $2000 per year on interest if you can drop from 5.5% to 3.5%. But if you are in a combined 20% income tax bracket that will decrease to a $1600 savings.
Look at how much it will cost to refi. Compaire that to what you owe and how many years left on your note. If you can save more than it cost then it may be a good idea.
You do not need a 30 year note and you can pay extra each month to reduce the pay off time.
Here’s a concrete example with your rates and fictitious mortgage amounts:
Original Loan=300,000 @ 5.5%
After 10 years
Interest paid=152,027
Balance=247,622
If you continue with this loan:
Interest in following 20 years=161,185
for total interest paid=313,212
If you refinance to 4% for 30 years:
Interest in following 30 years=177,964
for total interest paid=329,991
In this scenario refinancing costs you 16k in extra interest (which makes sense because you just borrowed for an additional 10 years), but if you invest your monthly savings, you could offset that with net gains from the investments.
Anectode:
I’m currently 7 years into a 30 year note at just under 6%. I’m about to close on a refinance for a 20 year note at just under 4%. I’m dropping almost exactly 2%. I’m also taking out a noticeable chunk of change to pay for remodeling my kitchen, three bathrooms, and more. And at my financial planner’s suggestion, I’m rolling my closing costs into the loan, so I have no out of pocket expense.
My payments will be going down about $20/month.
-D/a