With lower rates, you could reduce your monthly payment when you refinance. But a low monthly payment only helps your immediate budget. Over time, the interest and fees that you pay can easily outweigh the monthly savings you achieve.
The trick to noteworthy savings is choosing a shorter term. If you currently have a 30-year home loan with 25 years of payments remaining, refinancing to a 15-year mortgage may save you money. In addition, you may be surprised by how low your monthly payment may be.
While a shorter term can save you thousands, the APR (Annual Percentage Rate) does play an important role. What is the APR? It’s the annual cost of borrowing money over the term of the loan, and factors in the cost of fees and charges. The APR is a required disclosure lenders must provide before you sign any paperwork. The APR allows you to accurately compare lender options.
It can be a bit intimidating to consider all the options and try to discern what is a good deal. That’s where Solarity’s Home Loan Guides can help. At Solarity Credit Union, we offer 10-, 15-, 20-, and 30-year fixed-rate home loans to fit every budget and financing situation. The Home Loan Guides are experts in helping you find the right home loan for your unique situation.
Another option is to select an Adjustable Rate Mortgage (ARM). ARMs often have a lower interest rate and APR. Choosing an ARM can help refinance your home at a lower rate. Typical introductory fixed-rate periods include 3, 5, 7, and 10 years. After the fixed-rate period, your loan will “adjust” to the then-current interest rate. To protect you, ARMs often have limits on the amount of adjustment that can be applied at one time. ARMs can save you money, but it is wise to get helpful advice from an expert and do the math before you apply.
Refinancing isn’t Free
The average cost for refinancing a home can be upwards of $6,000 or more, depending on the lender. A good rule of thumb is to estimate 2% to 5% of the loan amount that will be charged in fees and prepaid refinancing costs. Those costs might include, but are not limited to, the application fee, attorney's fees, prepaid interest, loan origination fees, mortgage broker fee, upfront mortgage insurance, government fees (FHA and VA loans), property taxes, insurance premiums paid upfront, the title fee and title insurance.
While you can roll those fees into your new loan, it’s not always the best option, since you will pay interest on the fees over the life of the loan. That can really add up.
One of the fees that is the most confusing is points. When you pay points, you are essentially buying down the rate. As explained earlier, a lower rate is one of the ways you can save money over the life of your home loan. However, depending on how long you'll be in the home, it may not make sense to buy down the rate because the payback period can take years. To buy one point, you’ll pay a fee of 1% of the mortgage amount. This often cuts the rate by 0.25%, but that is not always the case. The reduction can be more or less than that.
Many lenders will try to “hook” borrowers’ attention by posting very low interest rates. But these rates are only attainable by buying points. This can add thousands of dollars to the cost of your home loan.
Lastly, in order to compare one lender to the next, remember to always compare the APR, not the interest rate. The APR factors in the cost of points paid and other fees and charges. The APR enables you to make it an equal comparison between lenders.
Solarity Credit Union is a top-rated mortgage leader
Our home loan experts understand mortgage math, including how a 15-year home loan can save you thousands over a typical 30-year option. Connect with our team at solaritycu.org and we will walk you through the process of selecting the right home loan for you.
*Rates and fees for example purposes only and are based on $250,000 loan amount with 80% loan-to-value for well-qualified borrower.