The last few years have brought historically low interest rates, making refinancing a popular option for many homeowners looking to save money. After all, the promise of lower payments, a locked-in interest rate and added savings each month would entice anyone to at least research it, right? Yet a recent study shows that American homeowners passed up more than $5.4 billion in potential savings because they failed to refinance their mortgages when they should have!
If you think refinancing might be right for you —congrats! You’ve taken the first step towards improving your financial situation. Use these tips for the best ways to save money when you refinance your home loan and you’ll be scooping up those savings in no time.
1. Consider the Term
Before you start researching rates, consider what you’re trying to accomplish. Is your goal to save on your monthly payment? Do you want to pay off your mortgage by a certain timeframe? The difference between a 15-year and 30-year refinance will impact the rate, how quickly you pay it off, and the monthly payment.
The shorter the loan term, the higher the payment and the faster you will pay off the loan. You can save on total interest costs with shorter, fixed-rate terms. On the other hand, if you’re simply looking to reduce your monthly payment, you may stick with a 30-year term.
For example, on a $100,000 loan at 3.5%, a 30-year loan payment would amount to $449 a month. You’ll pay off the loan with more than $61,000 in interest over this time period. The same amount borrowed over 15 years will amount to $715 a month, but you’ll only pay $28,500 in interest.
2. Shop Your Options and Programs
No two mortgages are created equally. Interest rates can change from lender to lender, as can things like appraisal and closing costs. Similar to when you purchased your home, shopping your refinance can help you determine the best loan to suit your goals and financial situation.
There are also several refinance programs out there via HARP and the VA, so make sure you’re speaking with lenders about programs that might be available to you based on your circumstances.
3. Do Your Homework on Costs
Keep in mind, there is more to a refinance than just the rate and term. Almost all refinances require an appraisal to determine your home’s current value, which can run several hundred dollars depending on your market.
Similarly, depending on the equity you have in your home, you may also have to pay for private mortgage insurance, which can also add to the total monthly payment. And, there are also closing costs —similar to when you mortgaged your house the first time— which also fluctuate from lender to lender.
Do your homework by inquiring about these costs with lenders. You may find that some are less expensive than others, offering you savings that can really pay off in the long run.
4. Shop Services Like Title Insurance and Appraisal
Many borrowers choose to add in their closing costs into their mortgage balance. This saves you from having to pay the cash upfront, but it will add to what you owe in the long run. So how do you know if you’re paying too much in fees to lenders?
To start, on average you will pay about $2,000 in closing fees on a $200,000 house, per Bankrate.com. Look closely at every lender’s three-page loan estimate for the section labeled “services you can shop for.” These generally include items such as settlement services, title insurance, and appraisal.
5. Switch to a Fixed-Rate Mortgage
If you’ve had an adjustable rate mortgage in the past, it may be wise to switch to a fixed-rate mortgage. The comfort of knowing your rate will never change, regardless of how long you keep the house, will help you budget and save money. You can save money when you refinance your home and switch to a fixed-rate mortgage because you no longer have to be concerned with the change of the interest rates.
Know your options when you refinance your home loan
Use our refinance calculator tool to get a loan estimate to help you determine the right option that will work for you in just three minutes. Contact us today with any questions you may have. We look forward to helping you reach your financial goals.