There are many reasons you might want to refinance – especially with rates this low:
• Eliminate interest rate risk going forward by converting a variable rate mortgage to a fixed-rate loan.
• Free up monthly cash flow by lowering your mortgage payment by hundreds of dollars.
• To pay for college costs
• To pay for repairs or remodeling
• To pay off your mortgage faster
• To build home equity faster
• To pay off a balloon payment
• Pay off higher-interest rate debt, like car notes, credit card bills or student loans
“O ka oiaio he onipa’a no ia.”
“Truth is steadfast.” – Hawaiian proverb
Why are rates dropping?
Mortgage rates had generally been rising for the last few years, with average rates bumping up against 5% earlier this year. Why did they drop?
Nobody knows for sure, but expectations of slower future growth and the prospect of increasing tariffs on Mexico and China in recent trade tiffs may have something to do with it.
Whatever the reasons, the decline stands to benefit a lot of people with older loans, or who have improved their credit scores in the last few years, enabling them to move into a higher tier of borrowers.
The general rule of thumb is that it makes sense to refinance if you can save at least one percentage point on your mortgage. That is, if your existing rate is more than a point or two above today’s rates.
Hawaii homeowners stand to benefit more than most from the recent drop in interest rates. Why? Because of the high home prices in Hawaii.
Let’s consider an example, using numbers pretty typical here in the Islands:
According to the 2017 Quarterly Consumer Debt Report from the Hawaii Department of Business, Economic Development and Tourism, the average mortgage balance in Hawaii reached $282,608 that year. That’s more than 68% higher than the average mortgage balance in the rest of the country, according to the DBEDT.
If your balance is close to this number, refinancing at today’s low rates may be able to reduce your monthly payments substantially.
Suppose you’re carrying a mortgage of $282,608 – the average balance for Hawaii homeowners. Suppose further that you have 15 years left on the loan at 6 percent interest. Your basic monthly payment should be around $1,413.07.
If you can refinance it at 4 percent, keeping the same remaining term, you’ll reduce your mortgage payment to $942.74 – a savings of $470.33 per month.
If we assume 3% in closing costs, that would amount to $8,478.74.
Your total savings over the life of the loan would be $76,180.77. And you’d recoup all your closing costs in 19 months.
That’s more than 13 years of savings.
When to refinance
Refinancing makes the most sense under the following circumstances:
• Interest rates are relatively low (as they are now)
• Your credit is at least fair (or as good or better than it was when you took out the original mortgage!)
• You want to accomplish one of the objectives listed above
• The break-even analysis benefits you.
Many experts suggest that refinancing makes great sense for most people when they can save at least 1-2% with the new mortgage. However, the higher the current mortgage balance, the more potential there is for savings.
When not to refinance
Refinancing might not be for you if:
• You’re not planning to stay in the home for long (ask us to help you calculate a breakeven point considering your closing costs)
• You have taken some recent credit hits that you can quickly repair. You may be better off applying after you have improved your credit score.
Now’s the time to lock in these low rates
Where are mortgage rates going tomorrow? Nobody knows for sure. But a look at the chart above indicates that there’s a lot more room for them to go up than to go down. And this analysis suggests that interest rates won’t stay this low for long. Call Pacific Home Loans today to lock in today’s great rates!
Call us today at (808) 891-0415, or fill out our online application here.
We look forward to serving you!