Your neighbor has refinanced her mortgage loan. Your son, too. Your co-worker two cubicles over has done the same. But you haven't. Why not? It's still not too late to save hundreds of dollars on your mortgage payment each month by refinancing.
You might not think you can save enough money each month to make the costs of a refinance worth it. Or maybe you're worried that you won't qualify for a refinance. But a study released by Black Knight Financial Services in July says that about 6.5 million homeowners across the United States could qualify for and benefit from refinancing their mortgages.
Some of these homeowners could save big money. Black Knight reported that about 500,000 U.S. homeowners could save $500 a month or more by refinancing. An additional 3 million could save about $200 a month, according to the study.
The message is clear: You need to call a mortgage lender to determine if you can qualify for a refinance and, if you do, how much you could save each month. If you don't make this call? You could be costing yourself hundreds of dollars a month.
"I have seen so many people talk themselves out of refinancing," said Kyle Winkfield, owner of Rockville, Maryland-based retirement-planning firm The Winkfield Group. "They look at the closing costs and they don't want to deal with them. But they don't understand how important it can be to have that extra cash flow that you get each month by lowering your mortgage payment."
4 Common Reasons for Not Refinancing
Have you -- despite today's low interest rates -- put off refinancing your loan? Here are the most common reasons why homeowners don't refinance, and why these reasons often make no sense.
1 - Closing costs are too high
It's not cheap to refinance. You can expect to pay at least 3 percent of your loan amount in closing costs. If you are refinancing $200,000, expect your closing costs to run at least $6,000.
You can usually roll these costs into your monthly mortgage payments instead of paying them upfront in one lump sum. But you do, of course, have to figure these closing costs when determining whether refinancing makes financial sense.
And often, it does, even with the closing costs.
Say you originally took out a 30-year fixed-rate mortgage loan of $225,000 at an interest rate of 4.75 percent. Your monthly payment -- not including property taxes or homeowners insurance -- would stand at about $1,173. Maybe when you are ready you only owe $200,000 on your loan. If you refinance that amount to a 30-year fixed-rate loan with an interest rate of 4 percent, your monthly payment -- again not including property taxes and insurance -- will fall to about $954 a month. That's a monthly savings of $219 a month, or $2,628 a year.
If you paid $6,000 to refinance your loan, you'll save enough to recover these costs in less than three years. If you plan to stay in your home for longer than that, then this refinance makes financial sense, even with the high closing costs.
2 - You're worried that you won't qualify
Mortgage lenders rely heavily on three-digit credit scores to determine who qualifies for a refinance, and at what interest rate. You might worry that missed credit-card payments or late auto-loan payments have dropped your credit score low enough so that you won't qualify for a refinance.
You might be right. But you'll never know unless you check with mortgage lenders.
The lowest FICO credit score you can have and still technically qualify for a loan insured by the Federal Housing Administration -- better known as an FHA loan -- is 500. But realistically, most mortgage lenders will hesitate to refinance borrowers with credit scores of 620 or lower.
Even if a lender would loan you mortgage money with a lower score, that lender will have to charge you a higher interest rate to make up for the increased risk you represent. If your rate is high, you won't save enough money each month to make refinancing worthwhile.
You should, though, check your credit scores to determine whether your FICO score is really as low as you fear it is. You can order your score -- for about $15 -- from any of the three national credit bureaus, Experian, Equifax or TransUnion. Your credit-card provider might even provide it to you for free.
Most lenders consider a FICO score of 740 or higher to be an excellent one. If your score is near that level -- and your debt and income levels are solid -- you should have little trouble qualifying for a refinance at a low enough interest rate to save money each month.
3 - You're intimidated by the paperwork
Here's the unpleasant truth: You will have to provide a lot of paperwork to refinance your mortgage loan. And the process to close a refinance can take up to 45 days.
Still, if you can save $200, $300 or more each month on your mortgage payment, doesn't it make sense to put in the effort to find that paperwork?
Lenders will want to see your two most recent paycheck stubs, last two months of bank-account statements, last two years of tax returns and your last two years of W-2 forms, at least. They use these documents to verify your income and employment status. You might also have to provide a statement from your supervisor on company letterhead stating where you work, what your position is and what your annual salary is.
4 - You might be moving soon
This last reason is actually a good one for not refinancing. If you don't plan on living in your home for at least five years after you refinance, it often makes little sense to pay the closing costs and go through the work involved in closing a new loan.
You'll need to stay in your home enough years to recover your closing costs and start building the savings that comes with refinancing. If you want to move three years from now? A refinance rarely makes sense.
"You really do have to consider how long you are going to stay in that house," said Keith Baker, a mortgage banking professor at North Lake College in Irving, Texas. "You might be desperate to lower your monthly payment by $200 a month. But if you aren't going to be living in your home long enough to cover the costs of refinancing, then refinancing doesn't make a lot of sense."