In January of 2015 interest rates plummeted to the 3% range for Conventional, FHA, VA and USDA 30 year fixed loans. If you are asking yourself “should I refinance” you are in good company.
The 1% Rate Drop Refinance Rule of Thumb
It’s important to determine what is best for you and your family relative to today’s historically low mortgage rates. Rates remain near all time historical lows and our team is always here to inform you of changes in the market and offer you advice.If you ask Uncle Larry “when should I refinance” he will likely say “you should refinance when your rate drops at least 1% – everyone knows that.” While this may be true in some cases, it is the worst way to singularly determine if you should refinance. Here are some examples to illustrate why this could keep you from reaping refinance benefits:
High loan amount
If you have a loan amount of $600k loan, a 1% drop in your rate would lower your payment somewhere around $351 per month. Great savings! However, if you refinanced that same $600k loan for a .5% lower rate you would still save you $175 per month. This is where things get interesting. What if the .5% lower rate is as low as rates ever go and you held out for a 1% lower rate. You would be paying $2100 per year to wait for a rate that may never come.
Low loan amount
If you have a $100k loan, a 1% drop in your rate would lower your payment somewhere around $56 per month. This is hardly worth going through a refinance
There may be other considerations besides reaching the fictional 1% drop milestone to refinance. For example, you may have FHA mortgage insurance that can be eliminated in addition to lowering your rate. You also may be able to lower your term (for example: from a 30 year to a 20 year) and keep your payment about the same as it was. While this does not save you monthly it will likely save you thousands over the life of the loan due to the drop in term.
8 Questions When Considering a Mortgage Refinance:
- Do I pay mortgage insurance?
- How much is my monthly mortgage insurance?
- Is mortgage insurance going away on its own and if so when?
- How old is my loan (how many months/years do I have left)?
- Would I benefit from a short-term loan?
- What are the true hard cost of a refinance?
- Where are current rates?
- What is my mortgage rate?
As strange as it sounds, ignore the “1% rule of thumb” and consult with The HOUSE Team to find out how you may benefit from a refinance. It is a no cost consultation so call or email us today!
By Jeremy House