Is it Time to Refinance?
When you turn on the TV, open a newspaper, or surf the internet you hear that interest rates are at an all-time low. If you haven’t refinanced yet, now may be the time to do so.
The following is a list of questions that you might consider regarding refinancing.
What do I need to know about interest rates and closing costs?
A general rule, you want to reduce your rate by at least .50%, however that number is highly dependent on two things
- Closing costs
- Amount of time you plan to stay in your home.
An easy way to calculate if refinancing makes sense is to divide the closing costs by your monthly savings. This will show you the number of months it will take to recoup the amount you spend on the closing costs.
Example:
Closing Costs: $1,500
Monthly Savings: $100
$1500/$100=15 months to recover the cost of refinancing
If the plan is to occupy the home for longer than 15 months then it makes sense to move forward.
Some banks have programs in which they will pay for closing costs. Generally the rate is a little higher rate in exchange for not paying closing costs. This is a good idea for people who may be moving in the short term. It is a way to take advantage of a lower rate, but not be concerned about recovering the costs of the loan.
How do I know if I am getting a good rate?
When comparing interest rates, it is important to know that not all rates are created equal. When extremely low rates are advertised, typically the lender is charging “points or an origination fee” which are forms of pre-paid interest. On point equals one percent of the loan amount.
Paying points represents a calculated gamble on the part of the buyer. There will be a specific point in the timeline of the loan where the money spent to buy down the interest rate will be equal to the money saved by making reduced loan payments resulting from the lower interest rate on the loan. Selling the property or refinancing prior to the break-even point will result in a net financial loss for the buyer while keeping the loan for longer than this beak-even point will result in a net financial savings for the buyer.
What is a reasonable amount to pay in closing costs?
When closing on a mortgage loan there are two types of fees. They are closing costs and pre-paid items.
Pre-paid items are costs that are paid as a part of owning a home such as taxes and home-owners insurance. Most home-owners pay these items with their monthly house payment and those amounts are stored in an escrow account.
Closing costs are the appraisal, credit report, flood certification, title work and underwriting costs. These are the fees that are associated with processing a mortgage loan. Closing costs are the actual costs of obtaining a loan. In Iowa, closing costs generally run $1,500-$1,700.
Even if you have refinanced in the past couple of years, you still may want to talk to a loan officer at VisionBank see if it makes sense for you to refinance again.
Dan Boes is the VP-Mortgage and Consumer Lending Manager. See his profile here
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Thank you Gary for your comment! I have sent your information to Dan, the Mortgage Lender that authored this article (see http://bit.ly/181ymXh). He is working on some information for you regarding your refinancing questions. Watch your e-mail, he should have a note to you yet this morning. Mary Savage--VisionBank
Mary Savage - VisionBank
| Apr 26, 2013 9:17 AM
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I am checking on current rates we purchased our townhome in Ankeny in August 2011 for 15 yrs at 3.8275 interest rate. I was wondering if we could save anything on our monthy payments at current rates doing a 15 yr or do you have a 10 yr. Do you have Bi-weekly payments. Gary
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