Many people have considered refinancing their home since the Federal Reserve lowered interest rates in 2020.
Last year, the annual average interest rates for 15-year fixed-rate mortgages and 30-year fixed-rate mortgages were 2.61% and 3.11%, respectively — the lowest since the Federal Home Loan Mortgage Corporation (“Freddie Mac”) started reporting in 1991.
And with the Federal Reserve stating that mortgage rates will not be raised until 2023, an increasing number of Galesburg homeowners are thinking about refinancing their mortgage.
Should You Refinance Your Mortgage?
Mortgage refinancing in Galesburg, Illinois is usually worthwhile if you intend on staying in your home for a long time. That is when a shorter loan tenure and lower rates truly pay off.
You could use the money you save by refinancing to help you with your monthly expenses, pay off your mortgage early, and save for retirement.
How Do You Work Out Your Refinance Savings?
Say you bought a $300,000 home in Galesburg with a 20% down payment ($60,000) and a 30-year mortgage at a fixed interest rate of 4%. You have been paying about $1,185 every month for the last ten years, and your mortgage balance is now $200,000.
You want to save money, so you are thinking about refinancing.
Using our mortgage calculator, you take your $200,000 mortgage balance, shorten the remaining 20-year mortgage term to 15 years and lower your interest rate by a percentage point—from 4% to 3%.
The shorter loan term will raise your monthly mortgage payments from $1,185 to about $1,400. But you will pay off your mortgage five years earlier and save $53,000 in interest.
A good rule of thumb is to make sure that your monthly mortgage payment does not exceed 25% of your monthly net salary.
Calculate the Break-Even Point
When you calculate the break-even point, you compare your refinance savings to the cost of the refinance itself—which includes closing costs of around 3–6% of the mortgage balance.
Using our example, suppose your refinancing closing costs are $6,000 ($200,000 x 3%).
Now we need to estimate how long you have to stay in your home for your mortgage refinancing savings to match that number.
For this, we must compare the amortization schedule of your current mortgage to that of the refinanced option—specifically, how much of your mortgage repayments go toward interest every year of your mortgage.
Will You Stay in Your Home Long Enough?
Continuing with our example, your current 30-year mortgage at a fixed interest rate of 4% would cost you $23,000 in interest over the next three years. On the other hand, a 15-year refinance at a fixed interest rate of 3% interest would cost you about $17,000 in interest over the first three years.
In other words, your mortgage refinance will offset its own closing costs ($23,000 – $17,000 = $6,000) in three years.
After the first three years, you will save thousands of dollars every year until you pay off your mortgage or sell your Galesburg home. However, if you relocate to a different house within three years after refinancing, you will not earn back the $6,000, and the refinance will be a waste of money.
Partner with a Trusted Mortgage Refinancing Company in Galesburg, Illinois
Are you looking for the top mortgage refinancing company in Galesburg, Illinois? If so, contact the home loan specialists at Compass Mortgage to learn more about refinancing your mortgage, and whether it’s the right decision for you. To get started, contact us today at (877) 793-9362 or send us an email by filling out this contact form.