With mortgage interest rates edging up but still hovering around record lows, refinancing seems like a no-brainer for people who have good credit and enough equity in their homes to qualify.
To check on your credit, visit annualcreditreport.com or call 877-322-8228. Federal law entitles consumers to free, annual copies of their credit reports, and that's where you get them. The reports are free, but there is a small fee to get your credit score, which is worth knowing.
But there are lots of different ways a loan can be refinanced, and making the most of a refinancing requires some shopping around.
Interest rate trends
Average U.S. rates on fixed mortgages rose for the fourth straight week last week, staying slightly above historic lows. Here's a look at rates for fixed and adjustable mortgages as of Thursday compared to a year ago:30-year fixed: 3.66%, up from 3.49%15-year fixed: 2.89%, up from 2.80%5-year adjustable: 2.80%, up from 2.69%1-year adjustable: 2.66%, up from 2.65% Sources: Freddie Mac Primary Mortgage Market Survey; Associated Press
After all, a house may be the most expensive thing you ever buy, but it's the mortgage loan that determines what you'll pay every month.
Here are some tips, and answers to questions I hear often.
First, could you qualify for a refinancing? To get the best deal, you'll need a credit score of 740 or higher, and have at least 10 percent equity in the property, which means the loan will equal no more than 90 percent of the property value.
To figure out how much equity you have in your home, you'll need a good estimate of the property's value, minus the balance owed on any home-secured loans.
Your refinance lender will order an appraisal, which you'll have to pay for, so you'll want to be confident about your home equity when you apply.
OK, so you've concluded that you would qualify for a refinancing. But would refinancing make sense for you?
The short, simple answer is: It makes sense to refinance if you will end up paying less (including the cost of refinancing), for the same or greater home equity, during the time you expect to own the property.
If you might move in a few years, refinancing is less likely to make sense, because it take time for the savings from lower interest rates to cover the up-front cost of refinancing.
Shop around for the best rates. Even a quarter-percent difference can add up to real money over the life of a mortgage. And compare apples to apples. Some rates assume you'll make an up-front payment, known as paying “points,” in exchange for a lower interest rate. A point equals 1 percent of the loan amount.
Compare costs and fees. They might amount to $3,000 or $4,000 on a typical home loan refinancing. Expenses can include an origination fee covering the lenders' charges, title services and title insurance, a credit report, appraisal, flood certification, property survey, recording fees and any points paid to get a lower loan rate.
Consider options: If you have a short number of years left on a mortgage, consider refinancing with a home equity loan. One credit union I have used is offering fixed-rate, 5-year home equity loans at 3.74 percent, for example, and the only up-front cost is a $100 processing fee.
There are lots of guides and formulas for seeing if refinancing makes sense, but the very best thing I can suggest is to run the numbers yourself. It's not that hard to do. Use one of the excellent free mortgage calculators available online. One of my favorites is on Bloomberg.com's website, under the “personal finance” tab.
Here's what to do:
First, review your current loan. Enter the amount you originally borrowed, the interest rate, and when the loan began. In return, you get a report (an amortization table) showing how much you've paid, how much is left, and how much of each payment goes to interest and principal.
Next, calculate different scenarios for refinancing and compare them to your current loan. You'll see exactly what you could save, how your home equity would change, and how long it would take for savings to cover refinancing costs.
By calculating different interest rates and terms, you can see what sort of refinancing would make the best sense for you. Some people want to cut their monthly payments, others want to pay off their debt as quickly as possible, and some want to do a little of both.
For example, consider someone with 20 years remaining on a 30-year loan with a 6.5 percent interest rate. Let's assume that person borrowed $150,000 originally, which means they are paying $940 monthly and still owe $127,164.
Let's assume that person is going to refinance that loan, plus about $3,000 to cover costs and fees, for a total loan of $130,000. That person could have these choices to consider:
A 15-year loan at 2.9 percent. The monthly payment drops by $50, the borrower builds home equity more quickly, and the loan is paid off 5 years early.
A 20-year loan at 3.5 percent. The payment drops to $754, the borrower builds equity more quickly than before, and the loan is paid off the same year as the current loan.
A 30-year loan at 3.6 percent. The payment plunges to $593, but the loan term grows by 10 years and the borrower will sacrifice equity gains.
Which option makes the best sense? That really depends on your financial outlook.
Cutting monthly expenses and paying off debt can be conflicting goals. Ideally, refinancing can help do both.
Reach David Slade at 937-5552 or Twitter @DSladeNews.