In my last article, Pay Less for Your Insurance Coverage, I showed you how to invest an hour of your time to save a few hundred dollars on your insurance costs. Hopefully you didn’t just read the article, but also decided to take action, because you’re going to want to roll that momentum forward today, trust me. Today I’m going to up the ante. You’ll have to invest more than an hour of your time, but trust me the payoff is much, much higher.
Photo by MichiganMoves via Flickr
Before you read the rest of the article, here is a true story from Pinyo:
I am in the process of refinancing my home loan. Basically, I am refinancing my $452,000 mortgage at 4.875% (28 years left) to a new 30-year loan at 3.875%. When it is all done, the monthly payments will be $330 less than what I am currently paying, and I’ll be saving $90,000 in interest over the life of the loan.
Refinance Your Mortgage to Save $20,000 or More in Interest
If you bought a home anytime in the past few years your interest rate is probably in the 4.5% to 6% range. From a historical perspective those rates aren’t actually too bad — just ask the previous generation that bought homes in the 1980s (interest rates ranged from 8% to 15% during that decade).
Nonetheless if you find yourself paying interest at 4.5% or higher on your home mortgage, I’m about to save you thousands of dollars.
Seriously. It’s easy to read “thousands of dollars” and brush it off, but you should be able to easily save $20,000 or more in interest costs. How many times in your life can you say one decision saved you $20k?
“How is this possible?”, you might ask.
It’s simple. A mixture of poor economic performance and drastic monetary policy by our government has plummeted home mortgage interest rates to unbelievable lows. You can now get a 30-year fixed-rate mortgage for about 3.75%.
Wow. 3.75%. I can remember Capital One 360 paying that level of interest on savings accounts just a few years ago!
Dropping your interest rate from 4.5% to 3.75% on a $160,000 30-year mortgage would save you $25,000 over the life of the loan. If your rate or mortgage is higher than those numbers, the savings are even more significant.
These low rates are an amazing opportunity for homeowners to shave thousands of interest off of their mortgage by refinancing into a new mortgage.
How to Refinance Your Mortgage
Here’s how to pull this off in 4 simple steps:
- Have a good credit score
- Meet loan-to-value qualifications
- Get refinancing quotes
- Pick the best deal and close
Don’t get overwhelmed — this isn’t that hard. But you need to act quickly because there is no way to know how long rates will stay this low.
1. Have a Good Credit Score
The lowest rates you see advertised go to those individuals with the best credit scores. If your credit report looks like you are a deadbeat you shouldn’t be surprised to get deadbeat interest rate offers.
Not sure where your credit stands? Here’s a brief summary on how to check on your credit report and credit score.
Finding your credit could be better? Here’s an article on how to improve your credit score.
Bottom line: Get you score as high as possible, quickly.
2. Meet Loan-to-Value (LTV) Qualifications
If your home is worth less than you paid for it (e.g., an underwater loan), refinancing is nearly impossible. Hopefully you put a significant down payment when you first bought your home, and have weathered the poor housing market enough that you have enough equity left to refinance.
Ideally, you have 20% in equity to be able to refinance to the best rates. Paying down your loan can help you get closer to that needed threshold.
Bottom line: Make sure you have at least 20% equity in your home.
3. Get Refinance Quotes
With the amount of money you are going to save it could be easy to think it doesn’t matter which bank or mortgage broker you go with as long as your rate drops.
Nothing could be further from the truth. The difference between an “Okay” refinancing quote and “Amazing!” refinancing quote could be thousands of dollars. I have a friend that recently refinanced. He got several quotes and the original bank his mortgage was through came in 0.50% higher than one he was able to get through a mortgage broker. The difference was more than $7,000 over the life of the loan.
Be careful not to rule out situations like rolling in closing costs. I was shocked to find the absolute best refinancing quote I got was one where I rolled all of my closing costs in. I thought paying extra points to lower the rate would be the best deal, but it wasn’t even close.
If you are not sure where to look, here’s a list of lenders and their offer for 30-year fixed refinance loan. You can also check out LendingTree and your local bank.
Bottom line: Work with several brokers and banks to get refinancing quotes. You’ll have to fill out a few forms and take a few phone calls, but having more competing offers is better than having just one quote.
4. Pick the Best Deal and Close
You shouldn’t drag your feet with any step in this process. The faster you decide who you’re going to refinance through, the faster you can lock in (i.e. guarantee) your interest rate. Rates fluctuate daily, so if you find a deal you like, jump on it.
From there the broker or bank will guide you through the steps of closing. It will be just like when you bought the house: there is an appraisal, you fill out lots of paperwork, and then you close on the loan.
Bottom line: Don’t delay. Your rate is not guaranteed until you lock it in with the bank or broker. Get the appropriate paperwork signed so the process will continue forward.
Your “To Do” List
To potentially save thousands in interest on your mortgage, you need to:
- See if your current mortgage is at least 0.75% above current market rates.
- Make yourself a valuable customer by having a good credit score and loan-to-value.
- Shop around to get quotes on refinancing your mortgage.
- Pick the best deal and close.
- Automatically save the difference in your old payment and your new one.
Is it that easy?
Absolutely. You don’t have to clip out 100 coupons out of the Sunday paper. This one decision can save you enough money to buy a nice car with the interest you save. Better yet it frees up cash in your budget so you can pay down other debts, start building an emergency fund, or contribute more to your retirement accounts.
Delaying on this will ruin your chances to get a historically low home mortgage rate. Period.
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.