I bought my house back in August 2006. Back then my mortgage rate was at 6.75%. It was absolutely the worst timing I could possibly be in. The rates had just started to go up and the housing boom peaked in late 2006 to early 2007. Fortunately, the rates started to come down again and I was able to refinance at 5.5% in January 2008. This lowered my monthly mortgage payment from $2250 to $2020, about 10%. I recouped all the fees in less than 18 months from the money I was saving. Now, the mortgage rates are down to new record lows once again and I didn’t hesitate to jump in to refinance again. Once again, I should be able to recoup the fees in about 18 months. It might even help me increase my credit score.
When To Refinance
The rule of thumb to refinance is when the rate you are able to lock in is at least 1 full percentage (or point) less then your current rate. In my case, my current rate is 5.5% and my new rate I was able to lock in at is 4.375%, which is greater than 1 percent. Also, make sure you have at least 20% equity in your home. If not, you may be forced to buy private mortgage insurance (PMI) which can add to your monthly payments by $150 or more. There may be a way out of buying PMI if your mortgage is owned by Freddie Mac or Fannie Mae. In my case, due to the drastic drop in home prices, my initial 25% down payment has decreased to only an 8% equity. But because my mortgage is owned by Freddie Mac, I don’t need to buy PMI.
What Can You Expect When Refinancing
One thing that caught me off guard during the refinancing process few years ago was the upfront payment that was required. I was told initially that all I needed to pay were the fees associated with the refinancing, about $2900, but when I was asked to pay $6300, I was very confused. However, they explained to me that the difference I was paying are the payments I needed to pay in advance, such as 1 month interest, home owners insurance and property taxes which came out to be about $3400. Although it appears that I’m paying $3400 extra, it really is not. The money goes into your escrow account where homeowners insurance and property taxes are paid out. The one month interest you’re paying is offset by not having to make your first payment until the following month. Since I’ll need cash up front, I will probably take some cash out of my online savings account to pay for all the fees. With the money I’ll be saving every month, I can re-budget my finances which will give me some additional breathing room to start saving even more. Since I’ll be paying less interest with the new mortgage rate, I also need to look into maybe decreasing my allowances in my paycheck. I don’t want to end up owing too much money in taxes by claiming too many allowances, but I think I’ll be OK for now.
I was able to lower my homeowners insurance due to the declining value of my home. It turned out that I was over-insured by $200,000. When they reassessed my home, my new rate went down by over $200/yr. Don’t pay more than you have to for your homeowners insurance. Get competitive home insurance quotes now and save!