What’s the interest rate on your mortgage?
In a survey that we commissioned at Bankrate, we asked homeowners with mortgages: “How confident are you that you know the interest rate on your current mortgage or other home loan?” Sixty-five percent said they are “very confident.”
I’ll refi, I swear
Can I make a confession? I edit articles about mortgages all day long, and I’m not sure what my mortgage rate is. I think I know it, but I might be off by half a percentage point. I do know that I really, really should refinance soon. Just as soon as we get the FAFSA and our income taxes out of the way, I promise.
Just as I promised last year. Heck, it’s easy enough to visit Bankrate’s refinance page.
People are overconfident
In her article about our latest monthly Money Pulse survey, “High mortgage rates? No biggie, poll finds,” Polyana da Costa spoke with mortgage planner Jim Sahnger. He said that when refinancers come in, he asks them their current mortgage rate. Later, he gets their loan paperwork and looks at the actual rate on the documents. Most homeowners didn’t really know their rate, he said.
So when 65 percent of homeowners say they are “very confident” that they know their mortgage rate, most of them are overconfident.
Boom goes the refi
The important thing to know is this: The 30-year fixed averaged 3.8 percent last week, and it has gone down a little bit since then. Homeowners with excellent credit and substantial equity have a good shot at getting mortgages at 3.75 percent this week. So it’s a good idea to find your loan paperwork and find out what your rate is.
There aren’t any rules of thumb that tell you when you should refinance. Here’s how to determine whether you should:
Calculating the break-even point
- Find your loan paperwork, or call the mortgage servicer, and find out your interest rate and the amount you borrowed.
- Find out how much you still owe (call the servicer for that figure).
- Use this mortgage calculator to find the monthly principal and interest that you’re paying now, based on the original loan amount and the interest rate. Write down the monthly principal and interest.
- Then input the amount you currently owe in the “Mortgage amount” box.
- In the “Mortgage term in years” box, put in the number of years that are remaining on your current mortgage. So if you got your current loan five years ago, and it’s a 30-year fixed, then input 25 years, because that’s how many years are left on your loan.
- Put in a reasonable interest rate. Right now, if you have a credit score of 740 or above, and you have at least 20 percent equity, you have a good chance of getting 3.75 percent or 3.875 percent.
- Write down the monthly principal and interest.
- Subtract the refi principal and interest from your current principal and interest to figure out how much would you save every month by refinancing. You can use that number to estimate your break-even point — how long it would take for your monthly savings to exceed the closing costs.
As a rough guide, assume that the closing costs will be around $2,500 to $3,000 (it might be more or less than that).
Divide the closing costs by the monthly savings. For example, let’s say the closing costs would be about $2,500, and you would save $50 a month. Divide $2,500 by $50, and you get 50. That’s the number of months it would take to break even. If you believe that you’ll remain in the house for at least four more years (48 months), then you save money in the long run by refinancing.
And don’t tell anyone that I haven’t refinanced. That’s just between you and me.