Would you like a smaller mortgage payment each month? Of course you would! Fewer dollars towards your mortgage means more money for the fun stuff in life, like investing, vacations, maybe even a killer pair of (real) Louboutins. Refinancing can make it possible. Its just about the hottest topic these days, and the only one virtually guaranteed to put more cold cash in your wallet -- if the conditions are right. Here are your need to know refinancing basics.
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Interest Rates and Your Mortgage Payment
Your monthly mortgage payment is tied directly to the interest rate on your loan. The lower your interest rate, the lower your monthly mortgage payment
. If you have a fixed-rate mortgage
, the interest rate was set when you signed your loan. If you have an adjustable rate
, it changes or adjusts, according to the loans terms every six months, or once a year, for example.
Todays rates for both fixed- and adjustable-rate loans are the lowest theyve been in decades. While the Federal Reserve has pledged to do what it can to hold rates low through 2014, some financial experts speculate that mortgage rates are unlikely to ever drop much lower than their current level
. So how can you take advantage of this terrific borrowing environment?
If youre in a fixed-rate mortgage with a rate above 4.0 percent, talk to your lender about refinancing options
the savings could be substantial. Lets say, for example, that you took out a $200,000 fixed-rate mortgage at six percent and, after making monthly payments of approximately $1,200 for nine years, your current balance is now a little over $170,000. If you refinanced the outstanding $170,000 principle into a 30-year fixed-rate mortgage at 4 percent, your new monthly payment would be $811.61. That saves you $388.39 each month.
If your mortgage has an adjustable rate, refinancing may offer even greater savings if you can get into a fixed-rate product. Youd also be exchanging an unpredictable rate with one thats consistent, which makes budgeting much easier. Not only will you get monthly savings, youll also get peace of mind.
SEE ALSO: Must Know Dangers of Adjustable Rate Mortgages
Refinance Closing Costs
To determine if a refinance is feasible, check the closing costs.
Youll pay fees for application, origination, inspection, appraisal, and points. These can run three to six percent of the loan amount. And, according to a nationwide survey, these costs have been increasing during the past two years.
In the above example, a $170,000 refinance with 3 percent closing fees would cost you $5,100. With your savings of $388.39 per month, it would take you just over 13 months to recoup what youd have spent in closing costs. After that, the true savings from the refinance begins.
If the possibility of reducing your monthly mortgage payment has piqued your interest, consult your mortgage banker.
A prequalification will reveal your potential new interest rate and monthly savings, as well as estimated closing costs. Refinancing is neither black nor white nor one-size-fits-all. But if one fits for you, youll save a bundle to buy those Louboutins. Just make sure that they, too, are a perfect fit.