If you have a mortgage, now is the time to consider refinancing.
With interest rates at an amazingly low rate and with most folks’ finances tighter than ever, refinancing may offer financial breathing room each month and thousands saved in the long run.
There’s a lot to know about mortgages, and since education is what we do, today we’re hoping to answer some questions in this area.
Q. They say a lower interest rate and making bigger payments can save money over the years. Can you explain that?
A. Sure. Take a 30-year loan of $150,000 at 7 percent. Making the payment of $997.95 each month over the life of the loan would result in repayment totaling $359,263. Of that, $209,263 is in interest alone. Take the same loan at 5 percent. With payments of $805 you would pay $289,883. And if it were 4 percent, payments of $617 would result in $257,804 over the life of the loan.
Now, that same $150,000 loan at 5 percent with a 15-year term would have monthly payments of $1,186 and result in a total repayment of $213,514.
So you can see there are significant differences with rates and terms. Taking the time to do a little figuring can save you a little or a lot of money.
Q. We’re making more income than we were when we set up our mortgage loan. Is it a good idea to pay extra each month – or maybe one extra lump chunk – toward our house?
A. Before you pay anything extra to the principal, create an emergency fund that equals at least six to 12 months of wages. That way in case of a job loss or other emergency, you will be able to make timely payments to your creditors and be able to stay alive. Once that is accomplished and you have paid off all your credit cards, then work on extra mortgage payments.
Each individual’s circumstance is different, but generally, if you apply extra money to your mortgage loan – even $50 a month – it will make an impressive impact on how much you end up paying overall.
For instance, using the previous example of a $150,000, 30-year, 5 percent loan, an extra $100 per month would reduce the loan term to 23.5 years and the total cost to $255,278. We’d say $34,605 is a pretty significant savings!
So if you have an income tax refund, a bonus or some other source of extra cash, applying it to your mortgage loan will be a huge benefit, but only after you have the emergency fund established and all credit card debt eliminated.
Check with your lender before adding that amount to your check, though. While most lenders automatically apply anything extra to the loan principal, you want to be sure yours is one that does.
Q. If we’re planning to refinance our house mortgage, what do we need to do?
A. The first thing to do (and something you might not think of) is spruce up your place. Before you start loan shopping, spend a little time giving your yard and house some tender loving care.
Most banks require an appraisal on a refinance loan. The enhanced condition can only benefit the appraisal, and a higher appraisal means more equity and more equity means a better loan. The loan-to- value can also greatly affect the interest rate your lender will charge you for this loan.
Don’t be tempted to borrow more than you need. You should know what you need before you make the application and stick to that amount. Though you can certainly find ways to use any extra money, do you really need it? Remember, you’ll be paying this money back for the next 30 years.
So yes, now – with interest rates the lowest they’ve been in years – is a good time to consider the possibilities of refinancing your home.
UPDATE: PAINT THE CORRIDOR
Have you noticed? Many of the Paint the Corridor 2012 volunteer teams have begun working on their houses.
Special recognition needs to go to the Aberdeen Presbyterian Church’s team, which has already completed its house! Take a look at the brush work at 604 Alder St. in Aberdeen. In fact, this industrious team even prepped another house in Hoquiam! Way to go!
The HHS Grizzlies have prepped their third house. This is the type of mass student community involvement that is nothing short of awesome and also helps them too, by fulfilling their community service requirement to graduate. You are all making an impact, thank you!
We want more volunteers. If you want to join this huge effort to spruce up our towns and to make your life better by “paying it forward,” call us at 533-7828.
Dave Murnen and Pat Beaty are construction specialists at NeighborWorks® of Grays Harbor County, where Murnen is the executive director. This is a non-profit organization committed to creating safe and affordable housing for all residents of Grays Harbor County. Do you have questions about home repair, renting, remodeling or becoming a homeowner? Call us at 533-7828, write us or visit us at 710 E. Market St. in Aberdeen.