How to Refinance Your Home Before It’s Too Late

Rock-bottom mortgage rates are rapidly receding into the past. Take these seven steps before the window closes.

Whether you’re thinking of refinancing or buying a home, now is the time to get that loan if you possibly can.

Reason: Mortgage interest rates are climbing — driven by signals of a strengthening economy and the Federal Reserve’s upward adjustments, including one last week of the federal funds rate, the rate banks pay to borrow money from the federal government.

Here are seven steps to follow when shopping for a mortgage.

1. Keep an eye on interest rates

Even small movements in mortgage rates can make a big difference in your monthly housing costs and in the interest you pay over the lifetime of your loan.

Look at it this way: If you’re borrowing $300,000, just a half percent difference in the interest rate costs you roughly $89 more per month. (You can play with the numbers on a mortgage calculator like this one.) And should mortgage rates rise a full percent, from an average rate of 4.3 percent on a 30-year fixed interest loan (per Freddie Mac on March 16) to 5.3 percent, the monthly cost of that loan rises by about $181 per month, or $65,160 over the 30-year life of the loan. Not chump change.

Here are the monthly payments:

  • at 4.3 percent: $1,568
  • at 4.8 percent: $1,657
  • at 5.3 percent: $1,749

Use Money Talks News’ mortgage rates page to keep an eye on rates where you live.

2. Figure out if refinancing pays

Will you come out ahead if you refinance? The devil is in the details.

Refinancing to a lower rate lowers a monthly mortgage payment. But it’s only worth it if the month-to-month savings exceed the cost of refinancing. In short, don’t do it unless you’ll stay in the home until you’ve saved more from the lower rate than you paid in refinancing fees.

Your break-even point is easy to compute: Divide your total refinance costs by your monthly savings. The result will be the number of months it will take to break even. Example:

  • Total cost to refinance: $2,000 (This includes all expenses and fees, from the initial appraisal to the final closing costs.)
  • Monthly savings from lower rate: $100
  • Months to break-even: 20

In this example, if we plan to stay in the house for more than 20 months, the refinance will pay for itself. If not, we’ve endured the hassle of refinancing and losing money in the bargain.

Use an online calculator like this one to compute your break-even point.

3. Can you lower your monthly payment?

A lower monthly mortgage payment is always welcome. Refinancing to a lower interest rate should drop your payment. But you can’t be sure, since the details depend on your loan amount, your credit score and other factors. (Bone up on mortgage basics by reading “Home Buying 101: How to Choose the Best Mortgage Option for You.”)

4. Get rid of your mortgage insurance

If you bought your home with a down payment smaller than 20 percent of the purchase amount, you probably were required to buy mortgage insurance. (It protects your home’s lender, not you.) Private mortgage insurance (PMI) charged on conventional loans can cost 0.5 percent to 1 percent of your loan’s value. Federal Housing Administration (FHA) mortgages include mortgage insurance, too.

PMI adds $41.50 to $83 a month to your payment for every $100,000 of your mortgage. With FHA mortgages and some conventional loans, you have to pay mortgage insurance for the life of the loan — refinancing is the only way out.

However, if you have 20 percent equity in your home when you refinance — whether through your payments or from appreciation of your home’s value — you won’t need mortgage insurance. (For more information on how and when you can stop paying PMI, click here.)

Check with your lender to see if your principal payments have exceeded 20 percent of the loan value. To figure your equity in an appreciating housing market, estimate the current value of your home. Here’s how to figure your home’s value:

  • Research just-sold listings online for properties near yours and like yours. Two sources: Realtor.com’s Just Sold section and the “Recent Home Sales” under the “Buy” tab on Zillow.
  • You can also look up your county tax assessor’s valuation of your home, although it may not accurately reflect the market value.
  • You can also look at estimates of your home’s value on real-estate websites — Zillow’s Zestimates, for example — to get a rough idea of value.

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