A very popular refinancing option is one where either the rate or term changes. The qualifications and paperwork necessary for a rate and term refinance are almost identical to that for purchasing a home, minus the inspections, real estate agents, and sellers. The home will be appraised and the rate you qualify for will be based on LTV (loan to value), loan size, DTI (debt to income ratio) and credit scores. It’s important to know all of the factors that go into determining a rate when you begin shopping for a mortgage company. If you were to call and ask,”What are your rates today?” and get an answer along the lines of , “3%”, then you need to hang up and call a different company. Reason is, that person is just telling you what you want to hear instead of getting the information needed to give you an accurate answer.

Do you want your mortgage lender to be honest with you or just tell you what makes you feel good?

There are several old rules of thumb out there that mislead people. For example, many people believe your rate has to drop 1% in order for a refinance to make sense. This is just not the case. Let’s take a look at a few examples as to why that way of thinking is incorrect.

Let’s say somebody has been in their home for 10 years and there’s been a dramatic change in their income and need to lower their bills in order to make ends meet. Refinancing into another 30 year mortgage at the same rate would save them money!

Date Balance Rate* Pmt
10 years ago $250,000 4.5% $1,266
Current $200,000 4.5% $1,013

*Example. Not current rates. Monthly payments are principal and interest only and do not include payments for taxes and insurance. The actual payment will be higher if you choose to include payments for taxes and insurance.

Here’s another scenario. Let’s imagine that the reverse happened and instead of a dramatic decrease in income, there’s been an increase. This person wants to pay their house off faster. Again, the same rate on a shorter term can save them money. It won’t be a savings monthly, but it will save them over the life of the loan.

Date Balance Rate* Term Monthly Pmt Total Pmts
10 years ago $250,000 4.5% 30 year $1,266 $455,760
Current $200,000 4.5% 15 year $1,529 $275,220

*Example. Not current rates. Monthly payments are principal and interest only and do not include payments for taxes and insurance. The actual payment will be higher if you choose to include payments for taxes and insurance.

This is a little bit more complex than the prior example so let’s take a closer look. With their original 30 year, they’ve already paid 10 years on it. So, there’s only 20 years left at a monthly payment of $1,266, which is a total balance of $303,840. Converting to a 15 year still saves them over $25,000 and that’s at the same rate!

An important thing to remember is that these are just two of many examples that disprove the saying, “Your rate needs to drop by 1% to make sense.” Statements like that don’t begin to cover enough of the details. It’s always best to check for yourself and contact MiLEND for an honest approach and explanation of what options are out there in order to save you money.

It’s also important to remember that a shorter term loan almost always has a lower rate. So, if you’re trying to beat the bank at it’s own game, do your best to shorten the term on the money you borrow. The bank won’t make as much money and even better, you won’t be spending as much money. Now that’s something you can take to the bank.