Four reasons to refinance by the end of the year

Is your New Year's resolution to save money? Refinancing your mortgage now could be a good head start.

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Are you hoping to cut costs in 2013? Then you might want to refinance your mortgage with one of the record low interest rates that have been a feature of 2012.

"With rates at historic lows, it's the perfect time to refinance if it makes sense for you," says Jim Duffy, a mortgage banker with Cole Taylor Mortgage. He adds that rates will probably not go significantly lower.

Duffy says that The Federal Reserve Board, the main governing body of the Federal Reserve System, which oversees national monetary policy and the banks, has been keeping interest rates low through some financial controls they wield that influence rates.

But they can't keep it up for much longer, he says. "And once they stop, rates will surely go up."

Read on to learn more about why you should refinance before the year ends…

Reason #1: Rates are at Historic Lows

You've seen all the hyped-up headlines, right? "Mortgage Interest Rates at Ridiculously Low Lows!"

Well, here's the thing: it's not all hype. Just consider the October 2012 press release from Freddie Mac, an institution established by Congress in 1970 to provide liquidity, stability, and affordability to the nation's residential mortgage markets. Its headline read "Mortgage Rates Hit All-Time Record Lows For Second Consecutive Week."

It went on to list the average interest rate on a 30-year fixed-rate mortgage as 3.36 percent for the week ending October 4, 2012, significantly lower than the 3.94 percent interest rate from the same week in 2011.

[Want to lower your interest rate? Click to compare rates from multiple lenders now.]

In addition, the release reported that the average amount in points a borrower could expect to pay was a low 0.6 percent of the amount of the mortgage. Points are a one-time charge by the lender, and can reach up to 3 percent of the loan amount, according to a mortgage settlement guide published by the Federal Reserve Board.

It's important to understand, however, that certain closing costs, such as appraisal, application, home inspection, and private mortgage insurance (PMI) fees, may also apply, adds the Federal Reserve Board. So, you'll want to make sure that the savings outweigh the costs before you decide to refinance.

Still it doesn't get much clearer than "all-time low."

Reason #2: 2012 is an Election Year

You might ask, "What does a presidential election have to do with the interest rate you score when you refinance?" Possibly a lot, says Chris L. Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans.

"If someone has the ability to refinance and it will save them money, they should take advantage of it now, because I would anticipate that after the election, and next year, we're going to see those rates start to climb," he says.

[Choose the right rate to refinance. Click to compare rates from multiple lenders now.]

Boulter says this is due to the fact that markets and other financial forces that drive rates - like big business, the Federal Reserve Board, and consumer behavior - do not like uncertainty. And what is an election except the uncertainty of who will guide the country for the next four years? So, with the election ahead of us and a continued - if weak - economic recovery predicted in 2013, interest rates could creep higher, he says.

Reason #3: Lock in a Low Fixed-Rate Mortgage

Do you have an adjustable-rate mortgage that has a low interest rate…for now? Are you starting to worry about what would happen if interest rates increased?

Now might be the perfect time to lock-in a low interest rate that can't change for the life of your loan.

First, let's back up and make sure the difference between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage is clear. In a fixed-rate mortgage, the interest rate, and the monthly payment, remains the same for the life of the loan.

[Think a fixed-rate mortgage is right for you? Click to compare refinance mortgage rates now.]

An ARM's interest rate, on the other hand, changes periodically depending on an agreed-upon market index, so it could go up or down, according to an ARM handbook published by the Federal Reserve Board. It adds that the initial rate of an ARM is usually lower than a fixed-rate loan, but that the low rate may only last from one month to five years or more.

Now, wouldn't you rather have a low rate that will last throughout your entire loan term, opposed to just one month or five years?

If so, make sure to lock in a fixed-rate mortgage now - before rates increase.

Reason #4: To Pay Less for Your House

How much did your house cost you? If you just repeated the listing price you agreed to pay before you took out your mortgage, you are way short. The fact is, you're house will cost you substantially more than its listing price, assuming you did take out a mortgage to pay for your home.

That, of course, is because the lender charges you interest on the loan. The higher the interest, the more you'll pay over time. But many people don't see how interest can increase the cost of their home over time, or more importantly, how refinancing to a lower interest rate can save them money.

The best way to illustrate this is to crunch the numbers in an example. Below, we'll assume you agreed to pay the seller $400,000, made a 20 percent down payment ($80,000), and got a 30-year fixed-rate mortgage with a 5 percent interest rate. Check out the savings if you refinanced that loan to a 3.36 percent rate (the average rate as of October 4, 2012 according to the aforementioned Freddie Mac).*


  Your Current Loan Your New Loan
Interest Rate 5 percent 3.36 percent
Loan Amount $320,000 $320,000
Monthly Payment $1,717.83 $1,412.05
Total of 360 Payments $618,418.51 $508.338.80

As the example shows, that $400,000 house really costs much more. However, it costs $110,079.71 less if you refinanced using the above numbers.*

*All loans and interest rates are subject to qualification. Lenders have their own criteria that borrowers must meet to qualify for specific interest rates. Your savings also depends on the rate you qualify for and the interest rate you currently have.

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