Refinancing is when a homeowner gets a new mortgage to replace a current one. The goal of refinancing is usually to get a better term or a better rate. During the process the original loan is paid off and a new loan is established.
Get a better rate
With a lower rate, refinancing can have a significant impact on someone’s overall finances.
Years ago, the thought process was that the new interest rate had to be at least 2% lower in order to reap any benefits of refinancing after paying the typical closing costs and mortgage origination fees. But now, even lowering the interest rate as much as 1% may be worth refinancing. Keep in mind when taking out a mortgage or refinancing your with a credit union on property in Georgia, there are no intangible taxes, another savings to your bottom line.
Let’s say your loan balance is around $100,000 and your current mortgage is a 30-year fixed rate at 4.75% with an *APR of 4.991%. Your current principal and interest payment is around $522, and by the end of your loan term, you will pay almost $88,000 in interest.
You might be considering taking advantage of the lower rates by refinancing. But is it worth it? With your new rate of 3.75% with an *APR of 3.977% on a new 30-year fixed rate loan, closing costs would run about $2,800 and your new payment would be $463. That’s $60 per month of savings, and you could save more than $20,000 in interest over the life of the loan, paying a total of around $67,000 as opposed to the original $88,000. And you could save even more with an even lower interest rate.
For other calculations and amortization schedules, try our mortgage calculator.
Something to think about – If you’re looking to reduce your term and pay your mortgage off early, before you refinance, consider making additional P and I (principal and interest) payments on your mortgage. This will achieve the same thing (paying your mortgage off early) without obligating you to make the higher payment in the event of an unforeseen hardship. Most mortgage companies require you to include instructions on how the additional payments should be applied, but check with your mortgage servicer to find out how they would like you to handle any additional payments. Also, check your original loan documents for any prepayment penalties.
Reduce or eliminate PMI
PMI is private mortgage insurance that is required by the lender when the loan to value ratio exceeds 80% or higher. PMI is usually paid as an additional part of the PITI P (Principal) I (Interest) T (Taxes) and I (Insurance) portion of the borrower’s monthly payment. So if you refinance and get a better interest rate and also meet the requirements of reducing or eliminating PMI, both P (Principal) and I (Interest) may be reduced giving the homeowner an even bigger savings.
Borrowers may also have the ability to refinance and take out a lump sum of cash out to use for things such as home repairs, home improvements, pay off bills, and more.
If you’re considering refinancing and have questions, don’t hesitate to contact the mortgage professionals at CDC Federal Credit union who will be happy to help you better understand your options for your unique financial situation.
For CDC FCU current rates, click here.
*APR – Annual Percentage Rate