Want to Save Money in the New Year?
After the Christmas bills pile up, many homeowners find themselves in a financial crunch and in need of some long-term financial savings strategies. There is good news for 2015, though. Interest rates are still near historic lows, which means this could be a great time to boost your monthly budget by refinancing your home mortgage.
To help steer you in the right direction, here are a few guidelines courtesy of several experts.
Do a mortgage checkup
Before you sign on a dotted line, it’s important that you carefully consider if refinancing is right for you and, if so, how you can renegotiate a loan with terms suitable for your financial needs.
David Reiss, who teaches residential real estate finance at Brooklyn Law School, says every homeowner mulling the possibility of refinancing ought to do due diligence to see if it makes sense. He points out that homeowners have to ensure that the interest savings are in place for enough years to recoup those costs and see a substantial return.
Bennie Waller, professor of finance and real estate at Longwood University, says smaller mortgage providers and community lenders are more likely to negotiate with you than national banks. If you decide to follow through with refinancing, Waller recommends doing so over an abbreviated period to minimize the time that lenders would be pulling your credit report, which can negatively impact credit scores. “Homeowners should not attempt to buy other big items or open new lines of credit when applying for a refinance loan,” he adds.
For homeowners who have built up equity in their properties, they can always do a “cash-out refinance.” This involves refinancing for a mortgage amount greater than what is owed on the home and using the leftover cash to pay off other debts.
Another option to consider is refinancing for a shorter term. “We do a lot of business where we might refinance a 30-year mortgage with 23 or 25 years left into a 15 year mortgage,” explains Matthew Helling, vice president of mortgage sales operations at Cambria Mortgage in Eden Prairie, MN. “If we can keep the customer’s payment as is or drop it a little bit, it will result in saving five or seven years’ worth of payments. Homeowners could conceivably use that model to lower payments—15 year mortgages are always cheaper and carry a lower interest rate than a 30-year mortgage.”
Calculate a break-even point
A general rule is that refinancing your mortgage makes good financial sense if you can lower your rate by one percent or more. Your individual break-even point will depend on a variety of factors, however, which can include your current interest rate, the new potential rate, closing costs, and how long you plan on staying in your home.
“One of those factors would be size of the loan,” Helling says. “If your mortgage is $300,000, a one-percent savings will net you $3,000. If your closing costs total $4,500, which would be on the high end, it would only take 18 months to break even. If you’re intending on staying in the property for an extended amount of time, it’s clear that refinancing would quickly offer a good return on your investment.”
To get an idea of your individual break-even point, check out this mortgage calculator.
Whatever you decide, just remember that refinancing is not a cure-all.
“Pulling out equity in one’s home should not be used for wants or extravagances, but rather for needs,” Waller cautions. This would only create additional debt burdens on your future budgets.
In the end, homeowners should factor in a number of criteria—market conditions, retirement plans, and net present value of their homes—before making a decision about refinancing their mortgages. But keep in mind that today’s low interest rates and the opportunity they could provide to significantly lower monthly budget costs won’t last forever.
Learn how Cambria Mortgage can play a part in your financing needs during home renovation projects by calling us at 952-942-0110 or emailing us today.