New data shows American homeowners may be missing out on substantial savings opportunities through a mortgage refinance. The Credit Sesame analysis of January 2012 user data reveals that, on average, homeowners who would qualify for refinance rates based on their credit profiles, income and equity in their homes, are overpaying an average of $471 per month on their mortgages. According to recent data from the Mortgage Brokers Association, 6 million homeowners pursued a refinance in 2011. However, after analyzing their numbers, Credit Sesame found that an additional 14 million Americans would benefit from increased savings by refinancing their homes.
According to the findings, only 30% of all qualified homeowners will pursue a refinance, while 7 in 10 qualified households will continue foregoing average savings of $56,520 over the course of 10 years. This means 14 million homeowners are throwing away $56,520 in savings.
With mortgage rates at record lows and the potential savings advantages, why aren’t more people refinancing? According to Adrian Nazari, Founder and CEO of Credit Sesame, Inc., “Many homeowners simply aren’t aware that there are better options available to them—options that could potentially save them thousands of dollars on their mortgage.”
When to Refinance
Lower interest rates are often one of the big reasons why many homeowners might choose to refinance their mortgage. The general rule of thumb on refinancing is to refinance when you can lock in an interest rate that is ½ to 1 full point lower than your existing mortgage or, when mortgage rates drop 2% below your existing rate. However, refinancing to take advantage of a lower mortgage rate isn’t the only reason to refinance a mortgage. Often times, changes in personal financial situations or risk considerations can make refinancing a viable option. Here are a few other reasons when it might make sense to consider a refinance:
1. Higher Credit Scores. The best mortgage rates and loan terms are typically reserved for consumers with a near perfect credit score. If your credit score has improved significantly since you bought your home, it’s possible that your new credit standing will qualify you for a much better rate and loan terms. To confirm your scores have in fact improved, it’s a good idea to request a free credit score check, just to be sure.
2. Reduce Risk with Fixed-Rate Loan. Adjustable Rate Mortgages (ARMs) usually have much lower interest rates initially than the Fixed Rate mortgages. However, once the variable rates start, depending on the economic conditions, the payments may rise significantly. Some homeowners may prefer less risky loans, like the Fixed Rate mortgages that have consistent monthly payments for the duration of the loan.
3. Reduce Mortgage Terms. To save money by reducing the length of your mortgage, you may have to take on higher payments, but in the long run, you will be paying less in interest.
Finding the Best Deal
The sheer volume and complexity of mortgage options flooding the market doesn’t exactly make it easy to find the best deal. From mortgage type to interest rates, closing costs and points, the search to find the right loan can be complicated and overwhelming. However, there are steps you can take to simplify the process and find the right loan for your financial situation.
1. Crunch the Numbers. Before you can determine what you can afford on a new mortgage, it is important to know where you stand financially. This includes factoring in your income, how much savings you have, any equity in your home, etc. Having a clear picture of your finances is a crucial first step in determining if a mortgage refinance is an option.
2. Know Your Score. What is an excellent credit score? Consumers with excellent credit scores of 720 or higher will qualify for the best interest rates and loan terms available. Alternatively, consumers with lower credit scores will pay higher interest rates and could receive less favorable terms, or may be denied altogether. Before you apply for a refinance, check your credit score to know where you stand beforehand.
3. Compare Loan Options. Comparing mortgage loan options and interest rates can be overwhelming but there are a number of innovative mortgage tools that can help. Credit Sesame’s mortgage loan comparison calculator, for one, will quickly analyze the financial impact of thousands of available loan options and visually present the top results to help you easily pinpoint the option that gives you the best deal and offers the most savings.
While a mortgage refinance may not be for everyone, it’s worth the time it takes to explore the options. Considering the 14 million homeowners that are currently leaving $56,520 in savings on the table, it certainly can’t hurt to find out. With a little planning and the right tools, you may just find that refinancing your mortgage could save you quite a bit more than you expected.