Mortgage rates have been in-the-basement low for quite a while. After the financial crisis and subsequent bailout of large banks in 2008 and 2009, the banks are sitting on a lot of underwater mortgages and are reluctant to repeat that mistake. They’re not lending to just anyone anymore. The is contributing to the fall in mortgage rates to historic lows.
An excellent credit score is a great asset during these times. Lenders extend credit on a tiered scale: the more creditworthy you are, the better rate you get.
I ran across a question in a forum that talked about a particular couple’s mortgage. The couple was “a few years into the mortgage” with a rate “that’s at over 5% fixed.” The couple also has a credit score of 800 or better.
An excellent credit score means refinance savings
MyFico.com publishes a summary of mortgage rates for various ranges of credit scores. The difference between rates for someone with a credit score in the low-600s and someone with a score in the upper 700s or 800s is about 1.5% now. The best rate now (1/27/2013) is around 3.1% for a 30-year fixed-rate mortgage. (It’s about 4.7% for someone in the low-600s.)
This is good news for the couple’s mortgage above. Let’s run some numbers to see what kind of savings this couple could see if they refinanced their mortgage.
Let’s say, for example, that they’re five years into a $200,000 mortgage at 5%. (5% isn’t a horrible rate, by the way!)
Their monthly payment would be $1,073.64. After five years, they’d owe $183,657.73 after having paid $48,076.13 in interest. They’ll pay another $138,437.11 in interest before the mortgage is retired.
Now let’s say that they refinance that remaining balance to another 30-year fixed mortgage, but this time at 3.1%.
Wow. The payment drops nearly $300/month! The new payment is $784.25. What’s more, even though they will have borrowed money for an extra five years — remember that they were five years into the first mortgage — they’ll pay nearly $40,000 less in interest! The total interest paid on this new mortgage is only $98,671.64.
What if they decide to reduce the term and go with a 15-year mortgage instead? The rate for a 15-year mortgage will be about a half-percent lower than the 30-year rate. So let’s run the numbers again for a 15-year mortgage at 2.6%.
The payment is about $150 higher per month than their original payment — the new payment is $1,233.27 — but the interest savings is huge. They’ll only pay $38,330.87 in interest with this mortgage. That’s a full $100,000 less than if they’d stuck with their original mortgage! Plus, they’ll be done ten years earlier than if they’d stayed the course with the original mortgage.
Bottom line: Check your credit rating and check your mortgage rates
If you have excellent credit — certainly if you have an 800 credit score — you can stand to save a lot of money if you refinance. Run the numbers to see!