Mortgage interest rates fell to historic lows this year, with the average rate on a 30-year fixed-rate loan falling to 3.87 percent. The average interest rate on a 15-year fixed-rate loan fell even lower, to an all-time low of 3.14 percent for the week ending Feb. 2, according to Freddie Mac.
This is good news for homeowners. By refinancing their existing mortgage loans to ones with historically low interest rates, owners can significantly reduce their monthly home loan payments. Consider this: If you are paying off a 30-year fixed-rate mortgage loan with an interest rate of 6 percent, your monthly mortgage payment will be $899.33 a month. If your interest rate on that same loan stood at 3.87 percent, your monthly payment would drop to $704.93. That’s a savings of more than $194 a month, or more than, $2,300 a year.
Should you refinance? That depends upon how much money you’ll save by doing so. Refinancing is not free. The Federal Reserve Board estimates that refinancing costs homeowners from 3 percent to 6 percent of their outstanding loan balance. So homeowners refinancing a $150,000 mortgage loan should expect to pay from $4,500 to $9,000 in closing costs. These costs can be rolled into your new monthly mortgage payments, so you won’t have to pay for refinancing in one lump sum. But you want to make sure that save enough money each month to pay off the costs of refinancing in a relatively short amount of time.
If you do decide to refinance, be warned: The process is not a quick one. First, you’ll have to find the right mortgage lender with which to work. When refinancing, you don’t have to work with the lender to which you are currently sending your mortgage payments. You can work with any lender that is licensed to do business in your state. Call as many lenders as possible to determine which lender will offer you the lowest interest rates and closing costs.
Once you’ve chosen a lender, you’ll need to provide documentation proving your income and debt level. This usually requires you to make copies of your current bank savings and checking account statements, most recent two paychecks, two most recent years worth of tax returns, credit-card bills, car loan payments and other important financial documents. Your lender will then review these to make sure that your income level is high enough and your debt level low enough for you to comfortably make your new monthly mortgage payments. In general, lenders want your total monthly debts -- including your estimated new mortgage payment -- to be 36 percent of less of your monthly income.
Your lender will also run your credit score. This offers your lender protection. The higher your credit score, the more likely you are to pay back your mortgage loan on time. Most mortgage lenders today reserve their lowest interest rates for those borrowers whose FICO credit scores are 760 or higher.
Finally, your lender will send an appraiser to your home -- a visit for which you’ll have to pay -- to determine the current market value of your residence. This is important: Most conventional mortgage lenders will only approve you for a refinance only if you have at least 20 percent equity in your home. There are some government programs, however, that will let you refinance even if you have negative equity; these programs, though, are more limited. For instance, you can only refinance with your current mortgage lender under them.
To kick-start the mortgage-refinance process, you’ll have to fill out a uniform residential loan application, an application that asks your basic questions about your income and debts, as well as personal information such as your current address, marital status, Social Security Number and whether you have any negative judgments against you.
Refinancing your mortgage loan isn’t the cheapest or easiest task you can take on. But if your lender does approve you, you can save hundreds of dollars every month. Thanks the nation’s low mortgage interest rates for that.
Image courtesy of Brave Heart via Flickr