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Anyone who has financed the purchase of a home in the last three years or is aspiring to purchase their first home has been waiting for this day. The day when the Federal Reserve would finally succumb to the realities that high interest rates are the reason for the anorexic real estate market and lower short-term interest rates.
For borrowers with interest rates higher than 7%, now is a good time to consider refinancing. If high interest rates have made you pause your quest to purchase a home, now is a good time to reconnect with a lender. (Call or text me).
Consider the following if your current mortgage rate is higher than 7%. If you borrowed $250,000 two years ago at a rate of 7.5% for 30 years you would currently owe approximately $245,000 and have a principal and interest payment of $1,748. Refinance your current balance to a rate of 6.5%, your payment drops to $1,548, saving you $200 per month.
What if interest rates continue to drop? Should you wait? What does your lender recommend? How much will it cost to refinance?
The cost to refinance including title company fees, lender fees and recording fees is in the $3,500 to $5,000 range and paid at settlement. If you spend $5,000 in closing costs for the benefit of saving $200 per month in payments it will take you 25 months to recoup those expenses. If you intend to live in your home for at least two years or longer then paying the costs reaps a good return on your investment.
An alternative is to increase your loan amount to $250,000 to cover closing costs and keep your $5,000. This increases your monthly 6.5% payment to $1,580 and reduces your monthly savings to $168 from $200.
To analyze whether it is a more prudent financial decision to pay closing costs or add them to the new loan balance determine how long it will take to get your $5,000 back if pay out of pocket and save $200 versus financing closing costs saving $168 per month, which is a difference of $32 per month. $5,000 divided by $32 per month equals 156 months or 13 years.
Your choice is to borrow what you owe $245,000, pay $5,000 in closing costs out of pocket, assuming you have it saving $200 per month. Or keep $5,000 and save $168 per month.
Another consideration when refinancing is paying points to get a lower interest rate. In our example of 6.5% and closing costs of $5,000 I am assuming no points. One-point equals 1% of the amount borrowed, in this case $2,500.
You could pay points which will lower the interest rate, but it will increase your closing costs. A good rule of thumb is for every 1 point the interest rate is reduced 1/4 %.
Using our example, your payment for $250,000 loan at 6.5% with no points is $1,580. If you pay $2,500 you can reduce your rate to 6.25 and payment to $1,539 saving $41 per month. Pay 2 points, $5,000 and your payment drops to $1,498 saving $81 per month.
Do not increase your loan amount to cover the cost of points. Since points are prepaid interest and increasing your loan amount to cover the cost of points means you are paying interest on interest. Not a prudent financial decision.
Servicing lenders are reaching out to borrowers with higher rate mortgages, offering discounts and deals if you act now and refinance. But acting quickly without considering the costs may not be the most prudent financial decision. It always helps to get a second opinion.
If you have been considering buying a home now is a great time to reignite your search. Rates are 1% lower than they were several months ago and may go lower.
Reach out to me for an honest second opinion if considering refinancing.
