Are you struggling with high monthly mortgage payments? Maybe you’d just like some extra cash to spend each month. Then you should know that there are some simple ways to cut your monthly costs through mortgage refinancing. And with today’s attractive interest rates, refinancing may make sense more now than ever. Let’s look at the options you have for monthly savings.
When Refinancing Makes Financial Sense
As a rule of thumb, if you can lower your current interest rate between 0.5% and 1%, then refinancing your mortgage usually makes sense. Does a 1% reduction really make that much of a difference? Yes. Let’s take a hypothetical existing 30-year mortgage for $225,000 with a fixed rate of 4%. Then refinanced at 3% after three years. Just calculating by interest and principal, the monthly payment at 4% would be $1,074 and after refinancing at 3%, it would be $846. That’s a difference of $228 per month, or an annual savings of $2,736.
Monthly Savings with Mortgage Length
Beyond simply getting a new interest rate on your mortgage, you may also consider lengthening the term when you refinance; by going from a 15-year mortgage to a 30-year one, you can significantly lower your monthly payments. It makes sense if you plan to stay in your home for a while. And consider that the savings don’t have to be just cash in pocket — you could invest that money. For example, earning, say, 8% interest by investing that monthly savings nicely offsets the lower rate of interest you pay on the refinance loan.
What about rising interest rates?
Yes, the historically low interest rates we’ve seen in the recent past have been going up; the rise was inevitable. And you may look at these increases and assume that refinancing won’t help you save money, or at least not enough money to make the effort worthwhile. But that’s simply not true for millions of Americans who, indeed, would benefit from refinancing.
Recent findings from Black Knight show that close to four million homeowners in the United States would be able to lower their monthly payments by refinancing their mortgages. The data and analytics firm identifies prime candidates for refinancing as homeowners who have 30-year fixed-rate mortgages, loan-to-value ratios that are less than 80%, with credit scores of 720 and higher. These homeowners should be able to cut 0.75% or more in interest on their mortgage loans.
It’s worth noting that the conditions for refinancing approval that Black Knight cites may be stricter than those of some lenders. With more lenient prerequisites, the number of borrowers who could reduce their monthly mortgage payments through refinancing jumps to nearly seven million people, according to Black Knight.
Figure Out When the Savings Really Start
If you are thinking about refinancing, you’ll want to determine your break-even point, when the costs of the new loan are surpassed by the savings. These refinancing costs are often anywhere from 2% to 5% of the loan’s total amount. Say, for example, that refinancing reduces your monthly payments by $100 and you paid $5,000 in closing costs. It will take 50 months (just over four years) to recoup the closing costs: that’s your break-even point when the saving begins.
Save With VA Streamline Refinancing
If you’ve already qualified for a VA Loan, you know it comes with big benefits, such as no down payment and no private mortgage insurance. But there’s another plus: an Interest Rate Reduction Refinance Loan, or IRRRL. Commonly called VA streamline refinancing, an IRRL is similar to refinancing for conventional mortgage loans. But with fewer restrictions than there are with other types of refinancing.
There’s a reason they call it “streamlined” — the road to approval is generally smooth with few obstacles. With a VA IRRRL, there’s no need to get an appraisal as you do with some other refinancing programs, and there’s often no need for a credit check, as credit underwriting packages aren’t required by IRRRLs. So even if your credit has taken a few hits since initially getting approved for your VA Loan, approval for an IRRRL is still possible. Plus, the funding fee and the closing costs of the refinancing can get rolled into the mortgage.
Steps to Take Right Now
As you approach refinancing, you might consider these first financial steps to get yourself prepared.
- Make a goal. Are you looking to move from an adjustable-rate to a fixed-rate mortgage? Or go from an FHA mortgage to a conventional loan? Beyond saving money each month, what you wish to achieve through refinancing should be clear from the start.
- Determine your home’s equity. Your lender will look at your home equity during the approval process, so you should, too. The more equity you have in your home, the less of a risk you are to lenders, and the better your refinancing terms may ultimately be. To figure out your equity, first determine your home’s market value; an online home value estimator will get you close. Subtract what you owe on your mortgage from that amount to determine your equity. If you have more than 20% equity, you’re well-positioned for refinancing.
- Check your credit report. Lenders almost always look at credit scores in evaluating applications for refinancing, so you don’t want any surprises. You can get a free credit report from the credit reporting agencies TransUnion, Equifax, and Experian. And know that you have the right to contest any errors you may find.
- Gather the needed paperwork. Your lender is going to want some financial information from you, so make sure you have the paperwork for your current mortgage. You’ll want to get your W-2s from the past two years, and your most recent pay stubs, or bank statements if you are self-employed or have non-traditional income.
Whether you stick with your loan’s current length, or stretch things out to pay less each month, City Lending is here with a range of refinancing programs that could very well lower your monthly payments.
Scrolling through lists of home features as you shop for a new house can be a dizzying experience. It can be difficult to know which home features you really want, which add value to the home, and which don’t. Let’s look at some things that contribute to a home’s value over time, and ways in which you can add value yourself.
The Features Most Folks Want
- A dedicated laundry room. Turns out, the old saying about airing your dirty laundry in public is true; a separate laundry room is one of the most desired features with home buyers, according to the National Association of Home Builders. People will pay for the privilege of keeping dirty laundry out of their living spaces.
- Three bedrooms. Three is the magic number when it comes to how many bedrooms the majority of home buyers want. Overall, 47% want three, compared to 32% who are looking for four bedrooms or more. Though drilling down on NAHB stats shows that 47% of married couples who have children want a minimum of four bedrooms.
- Open floor plans are highly desirable. So much so that a whopping 85% of home buyers say they want free-flowing space between the dining room and kitchen, while 79% want to have an open space between the family room and the kitchen, and 70% want the same between the family room and the dining room.
- Walk-in pantry. One of the most popular kitchen features with home buyers, walk-in kitchen pantries means more living space and less storage in the kitchen. Lots of people these days buy in bulk at big box stores, and it’s nice to have a place to store all those non-perishables mere feet from the cooking area.
- Two bathrooms are perfect. But not by an overwhelming majority: 37% of homebuyers want two bathrooms; 21% are looking for 2.5; while 26% wish to have more than three baths.
- Full bath on the first floor. According to the National Association of Homebuilders, having a half-bath on the first floor increases an average home’s value by 10%. Which is impressive enough. But that doubles to 20% if it’s a full bathroom: toilet, sink, shower, and tub. From families with young children they can bathe on the main floor to older adults who wish to climb stairs less, nearly everyone loves a full bath on the first level.
- Two-car garage. The majority of prospective home buyers, 42%, want a two-car garage, more than double those that want space for just one car (18%), and those looking for a three-or-more car garage (12%).
- The suburbs win with location. This is clear with the top sought after aspects of prospective areas to buy a home in, which are walkable suburban communities with trails for walking and jogging, close to both parks and ample retail options.
Areas Where You Can Add Value
When looking for a new home, it’s a good idea to keep an eye out for untapped potential, namely areas where improvements will pay off with increased resale value.
- Exterior illumination. This top feature on the NAHB’s list is also one of the cheapest to install. A few hundred dollars can illuminate a home’s exterior in dramatic fashion, with walkway lights, pendant lights, and strategically positioned spotlights. It’s a small investment with an attention-grabbing payoff.
- Upgrades over revamps. While going all-out on a full upscale kitchen remodel may seem like a solid investment, Remodeling magazine’s data shows that kind of large-scale overhaul brings in a 53% return when balancing cost against added value. A more moderate kitchen upgrade brings in an 81% return. The same is true with bathrooms; conservative updates see returns in the 70% range while extensive remodels return 56% on average.
- Ceiling fans. Simple, energy-efficient, and comparatively cheap, ceiling fans are desired by the overwhelming majority (83%) of potential home buyers. Energy.gov says any rooms in which you install ceiling fans should have heights of at least eight feet.
- Energy Efficiency. From energy-efficient replacement windows to Energy Star-certified appliances, most buyers are looking for homes that don’t waste money with utility bills.
- Side-by-side kitchen sink. Most people want a double sink in the kitchen. You can install one for about $500 and have a kitchen feature that more than 80% of homebuyers want.
- Adding usable square footage. Square footage has a direct impact on home value; bigger homes fetch bigger prices. But beyond additions such as second stories, consider making existing space more livable. Building a deck or finishing a basement are two of the best ways to create more usable space. Patios and front porches are two of the most wanted outdoor features for buyers, according to the NAHB.
And if you’re wondering how to pay for these value-adding improvements, home refinancing may be the perfect way to use the equity you already have in your home to get the cash you need for home improvements.
And some things that may not add value…
There are some common misconceptions about things folks think add value to homes, but actually don’t.
- Swimming pools top the list; while pools can increase the value of a home by up to 7%, they also come with maintenance costs (and upkeep hassles) some potential buyers won’t want.
- Overbuilding, such as a second story in an area of one-story homes, won’t considerably boost the resale value if the home goes beyond the neighborhood norm.
- High-end upgrades are great — if they’re consistent throughout the house. A sleek new kitchen won’t move the needle on the resale price very much if that’s the home’s only major renovation.
- Wall-to-wall carpeting. Processed with chemicals and known to trap allergens — not to mention the cleaning issues — carpeting can be a turnoff to would-be buyers. Best to tear out the carpeting and put in wood flooring.
Ultimately, the features you want in your new home, and those you wish to add, are matters of personal choice. When you do find the home you desire, City Lending is here for your mortgage needs from purchase to home improvements.