Money Talks, So Should You

Is it worth it: Mortgage refinancing

Clint Williams
by Clint Williams, Dimespring Contributor

Just when it seems mortgage rates can’t slide any lower, they do. The average rate for a 30-year fixed mortgage dropped to 3.53 percent in July, the lowest in Freddie Mac records dating to 1971. The cost of money is almost half what it was if you got a mortgage five years ago when the average rate for a 30-year fixed mortgage was about 6.2 percent.

Maybe it’s time to shop for a new mortgage.

The issue

Lower interest rates translate to lower monthly payments on a 30-year fixed mortgage, improving your cash flow — sometimes dramatically. A drop in the rates may also present an opportunity to switch from a 30-year mortgage to a 15-year fixed mortgage with rates of less than 3 percent. While the shorter-term mortgage won’t drop your monthly payment, it will reduce your overall interest cost and you’ll be able to throw that burn-the-mortgage party much, much sooner.

READ: Crisis Button: What to do if you're about to miss a mortgage payment

The breakdown

The math on refinancing your mortgage is pretty straightforward — you just need to make sure you include all the variables. There are costs associated with a mortgage beyond the interest rate you pay.

You may have to pay a loan origination fee. The lender charges the fee — typically 1 percent — or mortgage broker to evaluate and prepare your mortgage loan. You may also pay points equal to up to 3 percent of the loan. 
The points are either loan-discount points, a one-time charge that reduces your interest rate, or just a sort of commission for the lender. There are other costs — the application fee, the appraisal fee, the inspection fee, title insurance.

Typically, the cost of a new mortgage is 2-3 percent of the loan amount, says Michael Barnes, senior mortgage planner with Pinnacle Capital Mortgage in Scottsdale, Ariz.

READ: Designing your own mortgage

Because of the upfront costs, it’s important to run all the numbers, including the size of the loan, Barnes says.

“If you have a $50,000 mortgage and I’m saving you a point, refinancing may not save you any money,” Barnes says.

The World Wide Web offers dozens of online mortgage calculators designed to crunch the numbers of refinancing your mortgage. The calculators usually require information such as the remaining principal, interest rate, and years remaining of your current mortgage and the terms of the new loan that you are considering.

The verdict

If you have a mortgage rate of 5 percent or higher, you should strongly consider refinancing unless you’re within a few years of paying off your mortgage or if you plan to move in the next five years.

 

Clint Williams is an Arizona-based freelancer for DImespring. He has written for the Arizona Republic and the Atlanta Journal-Constitution.