Some homeowners are receiving a bonus from the historic drop in mortgage interest rates.
Let us take for example homeowner Albert of Sterling Heights. He got a $225,000 mortgage in 2008 at an interest rate of 5.625 percent. His monthly principal and interest payment on the loan is $1,295.00.
In 2012, the balance on his mortgage is down to $209,000. When he refinanced the mortgage under a new 30-year mortgage agreement at an interest rate of 3.5 percent, his principal and interest payment went down to $938, lower by $357 a month.
Albert was concerned that he is now starting a new 30-year mortgage which he has been paying since 2008. This means that 26 years have been left of his original mortgage period.
To answer this concern, here’s what he can do: If he makes the same payment of $1,295 with the $357 a month as an additional or extra principal loan payment, the loan will be paid off in about 18 years. So instead of paying off the loan in about 26 years, he will pay if off in about 18 years, saving him eight years or $124,320 in payments.
Some homeowners also take the option of getting a 20-year or a 15-year term outright. For a $209,000 loan at an interest rate of 3.375 percent, monthly principal and interest is $1,199 – which is $96 less each month and saving six years in payments. A 15-year fixed mortgage with an interest rate of 2.875 percent will have a monthly principal and interest payment of $1,430, only $135 more every month.
There is a cost to refinancing, so it is very important to review the benefit and the cost of refinancing. Most homeowners examine the option of refinancing when interest rates are at least half a point less of what they currently have.
It is also important to be ready for it. A homeowner needs income to qualify for any mortgage refinance.
It is likewise important to take care of one’s credit record. Homeowners with excellent credit scores get the best interest rates.