UPDATE: One of our readers, Petunia 100, found an error in this post. Recasting does not lower your interest rate—the only way to lower your interest rate is to refinance your loan. Sorry about that, and thanks, Petunia, for catching it!
I’ve refinanced my mortgage twice over the past three years. Why? Because not refinancing didn’t make a whit of sense. I was planning to be in my house long enough to recoup the closing costs on each of the transactions. That was all I needed to know. The first digit of my interest rate (and yes, I’m bragging a little) is a 4. Even a few years ago, that would have seemed unbelievable.
Maybe it’s time for you to take another look at your mortgage as well. It’s likely the heftiest line item in your budget, which means lowering that bill even a little can free up some much needed cash. Interest rates are incredibly low right now—averaging in the 4 percent range, so my rate isn’t out of reach for you—and for many, that means a refinance is in order. To determine if you’re a good candidate for a mortgage refi, you need to crunch some numbers. Start by answering three questions: How much is your current monthly payment? How much will your new monthly payment be? And how much are the closing costs?
Once you have those figures in front of you, you can subtract the refinanced monthly payment from your current monthly payment, and divide the closing costs by the result. That will tell you how long you need to stay in the home to recoup the cost of closing—and actually save money on the refinance. If you’re planning to move before then, stick with your current mortgage.
If you find you can’t refinance, or you’ve already done so, and want to knock your payment down even more, you might be able to “recast” the mortgage instead. This is a perk offered by some lenders—you’ll have to make a phone call to see if yours is among them—that allows you to pay down a chunk of your principal, and a small fee to the lender
, in exchange for a lower interest rate. The amounts required will vary by lender, but generally you’ll put at least a few thousand dollars (and sometimes more) toward principal and pay a couple hundred dollars as a service charge to the lender. You don’t have to apply for a new loan or go through the appraisal process.
Finally, whether you employ these strategies or not, consider making an extra payment on your loan each year (or whenever you have some extra cash). It will save on interest and help you pay off your loan faster. Take a $200,000 30-year fixed loan with a 5% interest rate. Over the life of the loan, you’ll pay over $186,000 in interest alone. But make one extra payment each year—that’s about $1,000, or less than $100 a month—and you’ll pay the loan off four years earlier and save over $30,000 in interest.