Is now the right time to refinance?

For most homeowners, the time to refinance has probably come and gone.

For most homeowners, the time to refinance has probably come and gone.

But if being underwater prevented you from refinancing your mortgage for the last several years, there’s good news. Home prices have increased substantially in most parts of the country, so you might finally qualify for the top rates.

While rock-bottom interest rates are probably gone for good, that's irrelevant if you didn't qualify before.

The deals truly still are fantastic.

The average 30-year, fixed-rate mortgage costs just 4.63%; the average 15-year mortgage rate is 3.70%, according to our most recent survey of major lenders.

You’re most likely to benefit from refinancing now if you took out your mortgage in 2009 or earlier and haven’t refinanced. Interest rates were around 6% then, and many homeowners who bought then found themselves underwater for the last four years.

Lowering your interest rate means saving thousands of dollars in interest payments over the life of your loan. And saving money on your mortgage is one way to work toward financial security.

Our 5 smart moves can help you decide whether refinancing is right for you and which type of loan will best suit your needs.

Smart move 1. Refinance if you can shave a percentage point off your mortgage rate.

This is still a good rule of thumb to follow when deciding whether you've found a worthwhile deal.

Let's say your home loan rate is about 5.6%. Refinance with current interest rates, and you'll reduce your monthly payments by about $60 a month for every $100,000 you borrow.

Pay careful attention to closing costs when considering offers from lenders.

Many mortgage brokers and lenders tell homeowners not to worry about the closing costs because they will be included in the loan and the homeowners don’t need to bring any money to the table, says Andrew Poulos, a tax accountant in Tucker, Ga. The reality is that the homeowner is still paying for closing costs.

The best deal for most borrowers is the one that offers the lowest interest rate, with no points and lender fees of $2,000 or less.

Our refinancing calculator can help you evaluate any offer more precisely.

It will calculate how much your payment will decrease and how long it will take to recoup any fees and closing costs. If it will take longer to recoup your costs than you plan to live in the home, the loan isn't right for you.

Smart move 2. Refinance out of an adjustable-rate and into a fixed-rate mortgage.

For most people, an ARM is not the best option because of its unpredictability, and with interest rates on the rise, the sooner you can get out of your ARM, the better.

When the interest rate resets, your monthly payment can increase significantly, possibly to a level you can’t afford. And with the most popular type of ARM, a 5/1 ARM, your interest rate will change every year after the first five years until you pay off the loan or refinance.

One case where you might want to refinance from a fixed-rate into an adjustable-rate loan is if you're looking for the lowest possible monthly mortgage payment and you're not planning to stay in your home for very long.

Just keep in mind that you’re taking a risk. It isn't always possible to sell or refinance when you want to.

The average introductory rate on a five-year, adjustable-rate mortgage is about a percentage point less than a 30-year, fixed-rate loan. Your rate will be locked for the first five years and reset once a year after that.

Our ARM or fixed-rate calculator can help you compare different types of loans.

Smart move 3. Consider reducing your mortgage term.

If you'd like to save a ton of money on interest charges over the life of the loan, you might consider refinancing into a shorter-term loan.

The rates on 15-year, fixed-rate mortgages are about 1 percentage point lower than those on 30-year, fixed-rate loans.

"If you can afford the payment, switching from a 30-year loan to a 15-year can be extremely beneficial," says Michael Metz, a mortgage broker with V.I.P. Mortgage in Scottsdale, Ariz. "More important than the interest rate, though, is the interest saved with amortization."

On a $200,000 loan at 4.5% interest, over 30 years you’ll pay approximately $165,000 toward interest. Make that a 15-year loan at 3.5%, and you'll pay only $57,000 toward interest.

"The 15-year has an astounding 65% less interest paid on the loan, despite the mortgage payment only being 40% higher," Metz says.

Our 15-year vs. 30-year mortgage calculator can help you figure out the potential savings for the deals you find.

Smart move 4. Refinance if you now have 20% equity.

Many buyers purchase homes with less than 20% down and have to pay for private mortgage insurance as a result. PMI typically adds $25 to $95 per $100,000 borrowed to your monthly mortgage payment, depending on your down payment and credit score.

But with home values on the rise, you might be in a position to refinance into a new loan and ditch the mortgage insurance. (You could ask your current lender to cancel PMI if you believe you've reached 20% equity, but there's no guarantee they will.)

Even if your payment doesn’t change much, refinancing to get rid of PMI is a smart move.

Getting rid of PMI means paying more money toward principal, Metz says, and may be a particularly good move for buyers with FHA loans.

Borrowers who took out FHA loans before June 3, 2013, have to carry this insurance for at least five years on all loans longer than 15 years or until the mortgage balance is down to 78% of the original purchase price, whichever is longer.

Smart move 5. Not enough equity? You still have options.

Many lenders won't refinance your mortgage unless you have 20% equity in your home. (If they do offer you a loan, it will come with private mortgage insurance.)

That can be a tough hurdle to clear if you live in an area where property values fell during the recession and still haven’t recovered.

If you have little equity, consider a cash-in refinancing. Use $20,000 or $30,000 of your savings to pay off a portion of your existing mortgage so that you need to borrow less with your new home loan.

With not only a lower interest rate but also a smaller mortgage, you'll enjoy even lower monthly payments and pay significantly less interest over the life of your loan.

You can also overcome an equity problem by applying through one of the federal government's big loan programs.

You might be one of the 580,000 borrowers Goldman Sachs analysts estimate could save $150 per month or more by refinancing through the Home Affordable Refinance Program. HARP allows homeowners to refinance a first mortgage, no matter how much the value of their property has declined.

To qualify, your loan to value must be greater than 80%. Your current mortgage must have been purchased or guaranteed by Fannie Mae or Freddie Mac — the big government-owned companies that provide most of the money for home loans in this country — prior to June 2009.

If you don't have mortgage insurance on your current loan, you won't be required to get it on the new loan.

You also must be current on your mortgage at the time you apply and have a good payment history for the last 12 months.

If this program isn't right for you, consider two others:

If you can qualify for an FHA loan, you'll need as little as 2.25% equity in your home to close on a new mortgage.

And veterans who can obtain a VA loan need no equity at all to refinance.


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