With interest rates are as low as they have been this year, homeowners are facing a dilemma. Should they purchase a home or just refinance the one they already own?
Since December, rates have been on a steady decline. In August, they were as low as 2.5% and are expected to be around 3% into September. Homeowners are taking advantage of the opportunity.
According to local lender Kristy Furman of Sunstreet Mortgage, last year at this time refinances were about 20% of their volume. Now they make up 60% because interest rates are so low. Homeowners can save an extraordinary amount of money on their current mortgage.
When I moved to Maricopa in 2006, interest rates were 7%. They were still near 5% in 2018. If you still have a mortgage at these rates and have not refinanced then you are just throwing money away.
Let’s look at a breakdown of how much a lower interest rate can save you over time. The average sale price of a home in Maricopa is $257,000. Here is what you would actually pay in principal and interest for a 30-year loan of $250,000 at the various rates:
3% = $1,054/month, $379,440 total
4% = $1,193/month, $429,480 total
5% = $1,342/month, $483,120 total
At the 2006 rate of 7% interest, the monthly payment would jump to $1,663/month, for a total cost of $598,680. So a home owner with a $250,000 loan at today’s rates will save almost $220,000 in payments over the life of the loan.
It makes sense to refinance if you can lower your rate by at least 1%. If streamlining, the cost of refinancing ranges between $3,000 and $5,000, depending on your lender and your loan type. That cost can be rolled into the loan for no out-of pocket cost. It’s a fairly simple process. You usually need a minimum credit score of 620, with no appraisal or income verification required.
However, refinancing is not the answer for everyone. If you can’t get an interest rate at least 1% lower than your current mortgage, it takes over a decade to recoup the cost of refinancing. And if you decide to sell your home within a couple of years of refinancing, any savings you intended could be wiped out.
If you are looking to move out of your current home, it’s a great time to sell and buy at these historically low interest rates. You can likely buy something newer and bigger with little or no increase in your monthly payment. And rates below 3% won’t stay around forever.
Dayv Morgan is a Maricopa Realtor and owner of HomeSmart Success.
This column appears in the September issue of InMaricopa magazine.