Have you been wondering how you could save $160 a month? That is the average savings homeowners realize when they refinance their mortgages. About 20 percent of households that could benefit from refinancing are not doing it—according to a report from the National Bureau of Economic Research.
Why homeowners don’t refinance when they should:
The report found that borrowers fail to refinance because they are unable to calculate the financial benefit to them, which can be significant over the life of the loan. I suspect that some people have refinanced before and know that it can be quite a bit of work.
Here are a few things you should know if you want to refinance:
- The average rate nationally last week on a 30 year fixed rate mortgage was 4.3% with .25 points charged. Several factors come into play when determining the interest rate offered. These include credit score, income, loan to value, occupancy type (primary, second home, or rental), and property type (single family, condominium, multifamily).
- Vacation homes or rentals typically have interest rates that are .25-.5% higher than a primary residence.
- You can frequently buy down the rate by paying points (an up-front fee). With today’s rates and pricing, however, it typically doesn’t make sense to pay these. I looked at a recent example (based on today’s rates) where it cost $2,750 to buy down the rate enough to save the borrower $29.50 per month. It would have taken 7.75 years to break even ($2,750/$29.50).
- The average borrower nationlly keeps his or her mortgage for about six years, and the median amount of time sellers have owned their home is hovering at about nine to ten years. So, often, a borrower won’t get the benefit of the lower rate from buying it down. Naturally, the buy down is pretty compelling (even at today’s rates) if you are confident you will stay in the same home for 15-30 years. See point vs. rate break even calculator.
- A Home Equity Line of Credit (HELOC) could also be used instead of a full refinance, depending on your objectives. The costs of obtaining a HELOC are often lower, and a HELOC can be attractive because you are only required to pay interest (no principal pay down). The interest-only period lasts for 10-20 years. Interest-only means lower payments even if the rate is slightly higher than what you might receive on a traditional mortgage. Naturally, interest is only charged on the outstanding balance or funds you have accessed.
A HELOC carries a variable interest rate that is comprised of the Prime Rate (currently 3.250%) plus a “margin.” The margin is based on a variety of factors similar to the interest rate determinants for a refinance loan: credit score, loan to value, occupancy, and property type.