Keep costs in mind
Refinancing comes with associated costs, and sometimes a lower interest rate can end up costing you more in the long run.
Reasons to consider
Consider the following as you decide whether to refinance your mortgage:
1. Interest Rates
- Compare your existing rate with what's being offered today. Then calculate your projected savings from refinancing. As a rule of thumb, if you can lower your annual percentage rate by more than 1%, it's worth thinking about refinancing.
- The larger the amount you owe, the more you'll save, because interest is a percentage of the total. For example, 1% of $500,000 would create more of a financial impact on you than 1% of $100,000, especially over the course of many years.
2. Better Mortgage Options
- Consider which type of mortgage would give you a better deal as compared with your current situation.
- For example, if you have an adjustable-rate mortgage (ARM) and your interest rate is about to rise, it may be to your advantage to refinance to a fixed-rate mortgage. With a fixed-rate mortgage, your monthly rate is predictable, because even if market interest rates rise, your mortgage remains the same for the life of your loan.
3. Your Plans
- The length of your mortgage term depends on your situation. Would you rather pay less in interest and pay the mortgage off more quickly? If so, a 15-year term might be for you. You'll have a higher monthly payment, but you'll pay less overall. With a 30-year mortgage, you'll have a lower monthly payment and more available cash each month, but you'll pay more overall than with a 15-year mortgage.
- Either way, your long-term financial plans should guide your decision. If refinancing is part of your short-term plan, you'll at least want to keep that mortgage long enough to cover your closing costs.
Keep it up. You're getting smarter about home buying.
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For comparison purposes, a 30-year fixed rate mortgage of $200,000 with a 20% down payment at an APR of 3.977% with 0.250 discount points and a $985 origination fee with a credit score of 740 would result in 360 equal payments of $940.47. This payment does not include tax or insurance costs—the total payment obligation may be higher. This is a representative example based upon rates that were effective as of 12/5/19. Rates and programs may change at any time.
For comparison purposes, a 15-year fixed rate mortgage of $200,000 with a 20% down payment at an APR of 3.430% with 0.250 discount points and a $985 origination fee with a credit score of 740 would result 180 equal payments of $1,405.34. This payment does not include tax or insurance costs—the total payment obligation may be higher. This is a representative example based upon rates that were effective as of 12/5/19. Rates and programs may change at any time.
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