For several years before 2017, mortgage interest rates just kept falling. Just when you thought they couldn’t go any lower, they did. But with the Fed’s recent announcement of an increased benchmark rate, banks are bumping up their prime lending rates.
Even still, rates are quite low. Freddie Mac puts the average mortgage rate for 30-year mortgages at 4.17% in February of this year, and banks aren’t likely to majorly hike that number immediately. Even with numbers beginning to climb, many homeowners are considering refinancing while the rates are still so low.
Are you thinking about refinancing your mortgage? It’s not terribly difficult, but it is enough of a hassle that some people don’t even bother. While you should at least consider running the numbers to see how much a refinance could save you, there are other money-saving options available.
Option 1: Ask for a Lower Rate
One potential option is simply asking your lender for a better mortgage rate. This doesn’t involve all the cost and paperwork of a full-scale refinance, but could still lead to a lower percentage. Of course, a better rate means that you can reduce your mortgage payment and/or pay it off even faster.
Don’t believe me? One blogger at NoCreditNeeded did this, and shaved 1.525% off the rate on his 15-year mortgage. Here’s how it went down:
NCN and his wife had been considering a refinance, as rates are significantly lower than they were three years before when they bought their home. However, they didn’t want to deal with all the paperwork. They also didn’t want to start over with a new 15-year mortgage, and they didn’t want to pay a bunch of closing costs.
Related: How to Save on Closing Costs When Buying a Home
Inspired by our earlier article on recasting your mortgage, he decided to contact his lender and ask if they could reduce his rate without changing the other terms of his mortgage. Amazingly, they agreed, and he had a new offer shortly thereafter.
I’ve heard of this happening quite often with distressed loans (wherein the rate is adjusted to help the borrower stay afloat). However, it’s less common for borrowers who are in good standing. Apparently, the lender decided it was better to give up a bit of interest income in order to retain NCN as a reliable customer.
The change required filling out just a few documents, and, while there was a processing fee involved, they’ll earn that money back on interest savings within just seven months. Going forward, they’ll continue making their “old” payment, with the difference being applied as an extra payment toward principal.
While you may only be able to pull this off if your loan servicer actually owns your mortgage (and many don’t), it can’t hurt to ask. The worst they can do is say “no.” On the upside, you might just wind up saving a ton.
Note that you might still be better off with a refinance. That way, you can play the field and get the best mortgage rates available — perhaps lower than your current lender will offer (assuming they’re willing to play ball). But if you’d rather not go to that trouble, you should at least consider asking your lender for a better deal.
Option 2: Prepay Your Mortgage
If your goal with refinancing isn’t necessarily to cut your monthly payment, prepaying your mortgage can help you save money over the life of your loan. Paying just a little bit extra each month can seriously reduce the amount of interest you pay over the life of your loan.
Prepayment can be particularly helpful if you have only a few years left on your mortgage, or if you have a relatively small mortgage. In this case, refinancing could cost more than it’s worth. This calculator can help you determine how much prepayment can save you.
Option 3: Get Rid of PMI
If you’re paying PMI — or Private Mortgage Insurance — on your mortgage, you could seriously reduce your monthly payments by getting rid of this extra payment. PMI can cost several hundred dollars a month. You’re entitled to get rid of PMI as soon as you have an 80% loan-to-value ratio.
What does that actually mean? If you originally bought a house worth $100,000 with a $90,000 mortgage, you can get rid of PMI after you pay off $10,000 of mortgage principal. Or, let’s say real estate explodes in your area, and your home’s value increases to $105,000 while you pay off $6,000 in principal. In either case, you have at least an 80% loan-to-value ratio, so you can get rid of PMI.
Getting rid of PMI involves some of the steps of refinancing your mortgage. You may need to pay for an appraisal if your loan-to-value ratio hinges on an increase in real estate prices. But it’s not nearly as expensive, since you don’t have to pay closing costs. Paying for an appraisal will likely cost less than paying for a few months’ worth of PMI, so it’s definitely worth the cost.
When you get rid of the PMI, you have a couple of different options. You can reduce your monthly mortgage payment and devote the saved cash to something else. Or you can continue paying the same payment, but pay down the principal more quickly.
Option 4: Try a Streamline Refinance
If you have an FHA-insured mortgage currently, you can take advantage of lower interest rates with a streamline refinance. Some banks also offer streamline refinances on conventional mortgages. Streamline refinances don’t necessarily reduce the costs of a refinance, but they do reduce the paperwork and hassle. If you have enough money to pay closing costs on a refinance but want to avoid the additional paperwork, check out streamline refinance options.
Learn More About FHA Streamline Refinancing
Option 5: Just Refinance, Already
These options are all great, and can make your life easier while saving you some money. But refinancing your mortgage can save you some serious cash.
If you’re planning to stay in your house for a while, you should at least run the numbers to see how much a refinance could save you. Do it today — before those interest rates start climbing!
I just called my mortgage company (Everbank) and asked if this was available for my loan and they said it was not because it is a Fannie Mae loan.
Just another data point.
I plan on moving in the next 2 years so a refinance doesn’t work out in my favor. Looks like I will just stick with my 5% rate a little longer.
For Lance, if your balance is low, you might want to consider a HEL. You can get them now for 1.99% with no origination fees or closing costs. While 4.625% isn’t horrible, it’s twice the rate you could be paying…
It’s hard to imagine how some people don’t seem to think a few hours of paperwork and phones calls isn’t worth saving a few hunderd dollars per month. To me, it’s a no-brainer.
Unfortunately my mortgage got sold and on top of that my balance is so low that the fees would likely eat me alive… oh well 4.625% isn’t a horrible rate if you look back over the last couple decades 🙂
Paul: I don’t know anything abou the size of his mortgage or the dollar savings so I can’t comment on the amount of the fee. That said, refinancing isn’t exactly cheap unless you roll the costs into the loan or sell points (i.e., accept a higher rate in return for cash) to cover the costs.
If I had to guess, I’d say we’re talking about at least a few hundred dollars. I also don’t know what how close to current refi rates his lender was able to get, but if that 1.5% decrease puts him anywhere near the going rate for a full-on refi for a few hundred bucks and minimal paperwork, I’d say that’s pretty darn good.
Remember, the perfect is the enemy of the good.
That processing fee sounds hefty if it takes 7 months to recover it.