By Jennifer Berry | Yahoo! Homes – Thu, Jun 20, 2013 9:34 PM EDT
- Yahoo! Homes/Photo: Thinkstock - Low interest rates are likely the reason why you're thinking about refinancing. But did you know that refinancing can save you money in other ways as well?
You know there are certain steps you can take - like refinancing to a lower interest rate
- that could save you a hefty chunk of change on your mortgage. But
what if you have some roadblocks that are in the way of taking those
steps to mortgage savings?
First and foremost, talk to a
professional. "Mortgage brokers can often find ways to save you money,
where banks are more limited because they have set programs," says David Kutner, a California mortgage broker with over 30 years of real estate experience.
To offer some additional assistance, we've outlined a few common
mortgage roadblocks and the best routes you can take towards cutting
costs.
Scenario #1: You Want to Refinance, But Can't Afford the Closing Costs
Solution: Roll the Closing Costs into Your Mortgage
Interest rates continue to hover near historic lows, according to a
report released in April 2013 by Freddie Mac. So if you're still paying 5
percent or more on your mortgage, now might be a great time to
refinance. But what if you are really strapped for cash and can't afford
to pay the closing costs and fees associated with the loan?
"If you don't think you have enough money for all the costs, talk to a mortgage broker," says Kutner. "You might be able to roll the closing costs into the loan amount and keep the same [interest] rate."
For example, if you refinance a $300,000, 30-year fixed-rate mortgage
and the closing costs are $10,000, rolling your costs into your loan
means your new mortgage will be $310,000.What does that mean for your bottom line? Let's look at some quick numbers:
| Closing Costs Rolled In | Without Closing Costs Rolled In | |
|---|---|---|
| Loan Amount: | $310,000 | $300,000 |
| Interest Rate: | 4 percent | 4 percent |
| Total Interest Paid: | $222,795.47 | $215,608.52 |
So while you'd be paying
$7,186.95 more in interest to roll your fees into your new mortgage,
rolling in your closing costs could help you take advantage of the lower
interest rates
available right now. If you had to wait until you had the cash on hand
to pay the closing costs, interest rates might have increased - which
could cost you a lot more money in the long run.
[Thinking about refinancing to a lower interest rate? Click to compare rates from lenders now.]
Scenario #2: You Can't Qualify for a Refinance Because Your Home is Underwater
Solution: Research Government Programs like HARP or HAMP
If your goal is to refinance to a lower your interest rate, but your
home is underwater, the Home Affordable Refinance Program (HARP) is a
program to look into.
It's designed to help people refinance when their house is worth less than they owe on their mortgage. Unfortunately, Kutner notes, the program is very limited in terms of its guidelines on how to qualify.
"You have to have a loan that was originated before June 2009, and it has to be owned by Fannie Mae or Freddie Mac," he says.
If HARP doesn't work, there is another program you can consider to help with your monthly payments: The Home Affordable Modification Program (HAMP).
With HAMP, a lender makes changes to your existing loan in order to
make your monthly payments more affordable, according to the
government's Making Home Affordable website.
Scenario #3: You Can't Decide Between a 30-Year or a 15-Year Term
Solution: Consider Your Cash Flow Before You Make a Decision
You're ready to refinance, but you don't know which mortgage length
to go with. So, how do you decide between a 30-year and 15-year term? "This is a cash flow issue," Kutner says. "If you go with the 30-year loan you'll pay less every month, but over the life of the loan you will pay more because you'll accrue more interest. However, if you take a 30-year loan and your income goes up, you can always double up on your payments."
So why would you ever go with a 15-year loan, then? "Because lenders offer lower interest rates for shorter term mortgages (maybe by half a percent or more)," explains Kutner.
To see how much you could save
overall in interest if you changed from a 30-year to a 15-year mortgage,
consider this example using a $300,000 loan, using the average rates
for a 15-year and 30-year fixed-rate mortgage from the week of May 28,
2013 (according to Freddie Mac):
| 15-year | 30-year | |
|---|---|---|
| Interest Rate: | 2.77 percent | 3.59 percent |
| Monthly Payment: | $2,038.72 | $1,362.25 |
| Total Amount Paid: | $366,969.82 | $490,410.31 |
Scenario #4: You Want to Pay Off Your Loan Fast, But Can't Commit to a 15-Year Term
Solution: Make One Extra Payment a Year
The thought of being debt free is pretty enticing, isn't it? Not
having to worry about the mortgage bill every month could mean being
able to save more for retirement, go on bigger vacations, or get that
new car a whole lot sooner. Not to mention all that extra cash you'll
save in interest.
But paying off your mortgage
quickly can be a daunting task, especially if you can't commit to the
higher payments that come with shorter-term loans. Luckily, there is one
commitment-free strategy you can take: Make one extra mortgage payment a year.
"Making even one extra payment a year shaves six or seven years off of a 30-year mortgage," according to Kutner.
But what if your monthly mortgage payment is $1,500, and you don’t
have an extra $1,500 just lying around? Try adding an extra $125 to your
mortgage payment each month. That's equivalent to making one extra
payment per year, but it a more palatable way. Kutner says this is great method because "If you add that to every payment, you're paying down the principal of your loan faster, which cuts down on the amount of interest you'll be paying over the life of the loan."
To help you decide which option is right for you, contact a lender for some professional advice.
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