With all the chat today about how mortgage interest rates are super low, even 2%, you may be wondering if a refinance would be a good idea to save you money. Now, of course, you’re like, “Wagner, it’s a no brainer. If my current rate is 4% and I can get it down to 2.5%, of course […]
With all the chat today about how mortgage interest rates are super low, even 2%, you may be wondering if a refinance would be a good idea to save you money.
Now, of course, you’re like, “Wagner, it’s a no brainer. If my current rate is 4% and I can get it down to 2.5%, of course it’ll save me money. Der.”
It’s true that lowering your mortgage interest rate will save you money. However. A mortgage is a bank product, and, like The House, The Bank always wins. What that means is that they’re not gonna just switch out your old high interest loan for a new low interest loan. They’re gonna charge you a few fees first. Sometimes the interest rate savings outweigh the fees. Sometimes they don’t. Here’s how to tell.
These are the factors that can affect the cost of your mortgage:
- Your credit score
- Your income—higher it is the lower your rate
- Your debt-to-income ratio
- The fee that the bank charges for making the loan (origination fee)
- Whether this is your primary residence or not (more likely to get better deal on primary residence)
- how long you’re gonna live there/keep the property
- length of loan 15 or 30 year (these should be fixed don’t even get me started) (shorter loan = lower interest rate = higher monthly payments)
If a Refinance Saves Me Money, What’s the Risk?
The risk is that you keep refinancing, which extends your mortgage out into the ether, so you’re paying until you die. Every time you refinance, you get a new loan, so you extend the time you are making mortgage payments. You don’t want to be making home payments in retirement so keep this in mind. (‘Cause you wanna keep your expenses down, to keep more money in the bank continuing to grow, so pay it off while you can.)
Watch the video for an example of how to compare three different mortgage loan products:
- low interest rate, with points
- middle interest rate, no points, no credits
- higher interest rate, with credits
The Mortgage Professor has an awesome mortgage comparison calculator that I use in the video. Here’s the link.