[box type=”default” size=”large”] Homeowners can save as much as $267 per month [/box]Many homeowners received a monthly “pay increase” this year when they refinanced their mortgage to take advantage of the historically low interest rates. These homeowners found out that lowering the interest rate by as little as one-half percentage point is advantageous.
There are other factors besides lowering your monthly mortgage payment to consider in deciding whether it makes financial sense to refinance and how to structure a new loan.
Let us consider the following example:
In 2008, Albert of Sterling Heights got a mortgage of $225,000 for a 30-year term. His interest rate was 5.625%, and his monthly payment was $1,295. In 2012, his balance was down to $209,000.
With a refinance rate of 4.25% (4.31% APR) for a new 30-year mortgage, his payment would be $1,028, giving him $267 savings per month. Although this monthly payment was affordable, he liked the idea of saving money from a lower interest rate, but he was concerned about going back to a new 30-year term.
Here was a simple solution to Albert’s predicament: Instead of paying the new monthly payment, he could continue to pay $1,295 a month on the new loan. This means that an extra $267 per month would come off the principal balance each month, and he would pay off the new loan in about 20 years instead of 25 years, effectively saving $77,700.
Albert had another option: The interest rate for a 15-year mortgage is even lower at 3.25% (3.35% APR), but the monthly payment is higher. His new monthly payment would be $1,468 – an additional $173 per month – but he would be paying off 10 years earlier, and his total effective savings would be $124,260.
He was very happy over both options, but decided to keep his current budget intact and closed with a new 30-year mortgage.
It is important for homeowners to know that they need income and good credit to qualify for a mortgage loan. Even if you are refinancing a home you already own, it is good to be ready so that the process is smooth, and you get the best interest rates.
This means you must take care of your credit. To keep your credit score high, don’t make any late payment and keep your credit card balances below 50% of the available credit limit.
(For any questions about this article, readers are asked to call Gigi Olegario at 734-572-2981.)