If you haven’t refinanced your mortgage yet, you could be missing out on significant savings.
With these low interest rates, homeowners may be able to save money on their monthly payments and even pay off their home loans faster through refinancing. But historically low mortgage rates can’t last forever, and experts believe rates will rise significantly as the Federal Reserve plans two rate hikes by 2023.
Mortgage refinancing is an easy process and the fees are low compared to the cost savings. Find out how much refinancing can save you in the analysis below and visit Credible when you’re ready to. lock in your mortgage refinance rate.
How much money can you save by refinancing?
Let’s say you bought a house for $312,500 in July 2013, by borrowing a 30-year fixed rate mortgage worth $250,000 after a 20% down payment. Back then, mortgage rates were around 4.5%, so your monthly payment is $1,267.
Now, eight years into your home loan, your current mortgage balance is $212,043. You’ve paid $83,647 in interest so far, but if you meet these loan terms and never refinance, you’ll pay $206,017 in interest over the life of your mortgage.
Tip: you can use a mortgage amortization calculator to see how much interest you’ve paid on your mortgage and calculate the remaining balance.
Option 1: Refinance a 15-year mortgage to pay off your mortgage faster
Many homeowners choose to refinance with a shorter-term mortgage so they can pay off their debts faster and save money in interest over the term of their home loan. The example below shows how much you could save by refinancing now when rates are low, using the hypothetical mortgage above.
Assuming the closing costs are 1.5% of the mortgage balance, they would be $3,257. Mortgage refinance closing costs are usually rolled into the total loan amount, so your new loan plus fees would be $215,300.
Mortgage rates on a 15-year fixed rate home loan are 2.2% as of July 8, 2021, according to Freddie Mac. Here’s what your new home loan would look like if you refinanced it for a shorter mortgage term:
- New monthly payment: $1,405
- New total interest: $37,670
- Total amount saved: $84,700
As you can see, the monthly payment is $138 higher, but you can significantly lower the cost of borrowing on your mortgage.
This is just one example, but it’s easy to see how much you can save by refinancing your mortgage. Use a mortgage payment calculator to estimate your monthly payment and interest savings based on your remaining balance.
Option 2: Refinance a 30-year mortgage to lower your monthly payments
Another reason homeowners refinance is to lower their monthly payments. Since interest rates are so low right now, you may be able to extend your loan term to lower your monthly payment while saving money over the life of your loan.
According to the same data from Freddie Mac, 30-year mortgage rates are 2.9%. Assuming a total loan amount of $215,300, including closing costs, here are what your loan terms would be:
- New monthly payment: $896
- New total interest: $107,312
- Total amount saved: $15,058
In the example above, you save $317 on your monthly mortgage payment. These cost savings can be allocated to other monthly bills and even paying off high interest credit card debt. And while it will take longer to pay off the loan, you’ll still save money over the life of the loan with today’s mortgage rates.
If you’re considering refinancing your mortgage, it’s important to compare rates from multiple lenders to ensure you get the best possible mortgage rate for your situation. You can get pre-approved to receive multiple mortgage offers in minutes on Credible.
Option 3: Refinance a 30-year mortgage and cash in on the equity
Refinancing by collection allows you to take advantage of the equity in your home by taking out a larger new mortgage and pocketing the difference after paying off your old mortgage. Home values are at historic highs, which means now may be the time to cash in on some of the equity you’ve accumulated in your home.
The median sale price of homes has increased by 25% between 2013 and 2020, according to Census Bureau data. With this growth rate, it’s not impossible that the hypothetical home purchased for $312,500 could be valued at nearly $400,000 by July 2021.
To protect it and avoid private mortgage insurance (PMI), say you take out a $300,000 30-year mortgage at a rate of 2.9%. Here’s what your new mortgage terms would look like:
- New monthly payment: $1,249
- New total interest: $149,528
- Full access to cash: $84,700
With a cash-out refinance, chances are you’ll pay more interest since you’re taking out a larger mortgage. But if you plan to invest that money in home renovations or pay off high interest credit card debtthen it can still be a worthwhile investment.
Mortgage refinancing can be a smart financial decision and the cost savings can be significant. If you’re still on the fence, get in touch with an experienced loan officer at Credible who can walk you through the process and help you make the best decision with your money.
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