Comparison of Refinance Rates
When borrowers looks to refinance their mortgage, many times they are simply looking for the lowest monthly interest rate. Although this a great way to start, it is not indicative of the whole picture. The borrower must also look at APR (annual percentage rate) when comparing mortgages to find not only the best monthly rate but the lowest cost overall.
Other People Are Reading
-
Monthly Rate
-
As a good rule of thumb, it is time to start looking into refinancing a mortgage when the interest rate is a full percentage point lower than what the borrower is currently paying. For example, if a borrower's mortgage is currently at 6 percent, when rates hit 5 percent, it is time to start shopping. When rates drop to a full 2 percentage points lower than a borrower's current rate, it is definitely time to refinance.
Say a borrower has a $150,000 mortgage and is paying 6 percent interest. His payment per month, before taxes and insurance is $899.33. At 5 percent interest, his payment is $805.23, and at 4 percent interest, his payment is $716.12.
-
Closing Costs
-
Another big factor in deciding to refinance is to take into consideration closing costs. These can vary widely from lender to lender, so it is best to get three different quotes when trying to decide which option to take.
It is important to note that if one lender has a significantly different rate than another, that lender may be charging the borrower a fee to lower the rate--a rate "buy down." Any rate the borrower wants can be bought; however, the cost may be very high.
Break-Even Point
-
When making a decision about refinancing, a borrower should take the amount saved per month on the mortgage and divide it into the total closing costs. This will tell the borrower how many months it takes to "break even" on the closing costs. A good rule of thumb is to never take more than 2 years to break even on the closing costs. This rule, however, is irrelevant if the home is going to be the borrower's residence for years to come. If the borrower believes the interest rate that she is receiving is going to be the lowest possible for many years to come, the break-even point becomes irrelevant.
APR
-
APR is more than just the monthly interest rate. It is a calculation of the entire cost of the loan. It takes into consideration both the monthly interest rate, the interest paid over the lifetime of the loan and the closing costs. This is the best and simplest way to compare offers between lenders. While closing costs can be shifted to show different totals, all lenders are required to use the exact same calculations to find the APR. The APR is found on the TIL (the Truth in Lending statement). All lenders are required, by law, to give this to each borrower at application.
APR Comparison
-
To compare APRs, take all of the Truth in Lending statements and place them side by side. The lowest APR is the lowest cost loan. Even if the monthly interest rate is the highest, if the APR is the lowest, than this loan is the cheapest in the long run.
-
References
Resources
- Photo Credit "Subprime Crisis No Barrier to Affordable Housing" is Copyrighted by Flickr user: woodleywonderworks (woodley wonderworks) under the Creative Commons Attribution license.
