Have you missed a chance to refinance? It depends

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Interest rates for a 30-year fixed-rate mortgage hit their lowest point in the past four months at the beginning of October, when they fell to 4.89 percent. Now they've climbed back up to 5.32 percent. Does that mean you've missed the boat and shouldn't try to refinance?

The answer is that it depends upon the type of loan and the interest rate you have now. For example, if you have a 30-year fixed-rate loan and can save at least one percent in interest on that loan (at current rates, that would mean you have a fixed rate of 6.32 percent or higher), you may want to take a look at refinancing.

Rates have been fluctuating up and down, and may drop below 5 percent again, but since the Federal Reserve has been making noises about winding down its monetary stimulus, you can't count on that happening. If you have an adjustable-rate mortgage or a home loand with a balloon payment, you should definitely think about locking into a fixed-rate mortgage before the Fed starts goosing up interest rates.

If your mortgage is underwater and you owe more than it's worth, you may still be able to refinance using the government's Making Homes Affordable program. Who qualifies for it?

You may be eligible if:

  • The loan on your property is owned or guaranteed by Fannie Mae or Freddie Mac;
  • At the time you apply, you are current on your mortgage payments ("current" generally means that you haven't been more than 30 days late on your mortgage payment in the last 12 months. Or, if you've had the loan for less than 12 months, you have never missed a payment);
  • The amount you owe on yourfirst lien mortgage doesn't exceed 125 percent of your property's currentmarket value;
  • You have a reasonable ability to make the new mortgage payments; and
  • The refinance improves the long-term affordability or stability of your loan.
Let's take a look at three home mortgage interest rates and how much they'll cost you. I've based these calculations on a $200,000 mortgage for 30 years. At 4.89 percent (the most recent low), monthly principal and interest payments would be $1,060.24. At the most recent rate of 5.32 percent, that payment would be $1,113.09, or $52.85 more per month. The possibility that interest rates may fall again could be worth waiting for, but what if they don't?

Suppose you have a loan at 6.32 percent, just one percent higher than the recent 5.32 percent rate. The payment for that loan would be $1,240.55, or $127.46 per month more than the 5.32 percent loan. As long as you can get a low-cost refinancing deal, you would likely save what you paid in out-of-pocket costs to refinance within two years. After that, the savings are all yours.

To determine if it's the right time for you to refinance, you need to calculate what the payment would be for a 30-year mortgage versus what you're currently paying. Then research costs for a refinance in your area. Lending Tree is one good source to get mortgage lenders bidding for your loan. I've used its service a few times myself and found that by getting bids from several sources, you can generally start pitting one deal against another to get even lower-cost offers.

What does the interest savings mean for a 30-year mortgage over five years (which is the average amount of time most people spend in a home) or over 30 years? I looked at the amortization charts for the $200,000, 30-year fixed rate mortgage at 4.89 percent, 5.32 percent and 6.32 percent. The total interest costs for a 4.89 rate loan over five years was $46,983.33. The 5.32 percent rate loan would cost $51,260.81, and a 6.32 percent loan would cost $61,262.86.

Over the full 30 years, the cost differences among these loans are even more dramatic. For the 4.89 percent mortgage, total interest costs are $181,685.73. At 5.32 percent, they're $200,714.06, and for the 6.32 percent loan, the total is $246,599.50. So if you're determined to stay in that home for 30 years, you can save almost $46,000 over the life of the loan by cutting your interest rate just one percent.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask About Buying Foreclosures."
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