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Should I refinance my mortgage?
Over the last couple of years with interest rates at a 40-year low, many people refinanced their mortgages. Even though rates have crept up over the last couple of months, refinancing may make sense for you. Use our refinance calculator to analyze your situation today!
Why Refinance a Mortgage?
When mortgage interest rates drop more than a percentage or so, some homeowners will decide to refinance their loans to get a better rate. Consider that average interest rates on fixed-rate mortgages have ranged from less than 7 percent in the late 1990s to more than 15 percent in the early 1980s, and you can see that refinancing can result in significant savings for the homeowner.
A general rule of thumb is to refinance when interest rates drop 2 percentage points or more. For example, if you have a $100,000, 30-year, fixed-rate mortgage at 10 percent, you will pay more than $215,000 in interest over the next 30 years. But if you have a $100,000, 30-year, fixed-rate mortgage at 8 percent, you will pay less than $165,000 in interest over the same period.
What Types of Refinance Are Available?
You may want to convert an adjustable-rate mortgage (ARM) to a fixed-rate loan to gain stability in your monthly payments or in the event that interest rates drop faster than your ARM can accommodate. Many ARMs have caps limiting the amount of periodic adjustments. So, if interest rates drop 3 percentage points in a year but your ARM has a 2 percent annual cap, you may want to refinance to take full advantage of the new, low interest rates.
When interest rates drop, you can refinance to take advantage of the new rates, getting either a new ARM or a fixed-rate mortgage at a lower rate. When you replace an old ARM with a new one, you generally reset your mortgage’s lifetime adjustment cap. For instance, if your old mortgage had a lifetime adjustment cap of 6 percent and the initial rate was 10 percent, your mortgage rate could go as high as 16 percent. If you replace your old mortgage with an ARM with a rate of 8 percent and a lifetime adjustment cap of 6 percent, your mortgage interest rate will never go higher than 14 percent.
What Are the Disadvantages of Mortgage Refinancing?
Besides the costs of refinancing, you may want to consider other potential disadvantages before signing on the dotted line. For example, if you cash out some of the equity in your home, you will own less of your home when the deal is done. And it may take you longer to own your home free and clear than if you had not refinanced.
Time is also a consideration when it comes to refinancing costs. How long will it take for your new interest savings to pay off the property appraisal, title insurance, and other costs? You may have to live in the house longer than you planned to make the refinance worthwhile. If you move before you have recouped the refinance costs, you will lose money on the deal.
- Current loan balance The amount you currently owe on your existing mortgage.
- Annual interest rate The interest rate on your existing mortgage.
- Number of months remaining The number of months remaining on your existing mortgage.
- Annual interest rate on new mortgage The interest rate you can get on your refinanced mortgage. This should be lower than the interest rate on your existing mortgage.
- Number of months The number months you will be paying on your refinanced mortgage loan. 30 years = 360 months, 20 years = 240 months, 15 years = 180 months.
- Loan origination fee This is a fee charged by the lender to evaluate, prepare and submit your loan. It typically ranges for 0.5% to 2%.
- Other fees/discount points Lenders charge various other related fees. Enter any other fees or discount points as a percentage in this field.
- Other fees: Lenders charge various other related fees. Enter any other fees as a monetary amount in this field.
This information may help you analyze your financial needs. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Hypothetical illustrations may provide historical or current performance information. Past performance does not guarantee nor indicate future results.