Save money: refinance in 2013

Tony Moton

The past year in the mortgage industry was a promising one, with the housing market showing some signs of turnaround and home prices starting to rise again. But most importantly, we saw interest rates hit rock bottom.

"There has been a surge downward in interest rates, so it's a good time for people to think about refinancing if they have not explored it," says Brownie Stanisch, a senior loan consultant from Sherman Oaks, Calif.

Unfortunately, the opportunity to refinance to these record-low mortgage rates won't last long.

So if you're a homeowner who is thinking about ways to save money, keep reading to learn more about four reasons you should refinance now.

Reason #1: The historic interest rates could go up

Could history repeat itself in 2013 in terms of record-setting mortgage rates? Stanisch says that's highly unlikely, which is why homeowners should consider refinancing sooner rather than later.

"[Homeowners] might miss an opportunity to get the kind of rate they could get now," Stanisch says.

That rate - according to Freddie Mac, an organization chartered by Congress to stabilize the nation's residential mortgage markets - was just 3.57 percent on February 4, 2013 for a 30-year fixed-rate mortgage (FRM). The average for a 15-year FRM was 2.90 percent on the same date.

But the Mortgage Bankers Association (MBA) forecasts a rise in interest rates to 4.7 percent by the end of 2013 for 30-year mortgages. To see just how much of an impact that difference in percentage points can make, let's look at an example using a $300,000 loan on a 30-year term, comparing the February 4, 2013 rate and the predicted 4.7 percent rate.

  Current Rates Predicted Rates
Interest Rate 3.57 percent 4.7 percent
Loan Amount $300,000 $300,000
Monthly Payment $1,358.88 $1,555.91
Total of 360 Payments $489.198.16 $560,128.83

As you can see, if you waited to refinance and the mortgage rate did go to 4.7 percent, you'll find yourself paying almost $200 more per month - not to mention $70,930.67 more in interest over the life of the loan.

[Want to save on your mortgage? Click to compare rates from multiple lenders now.]

Reason #2: To get out of an adjustable-rate mortgage (ARM)

Are you a homeowner with an adjustable-rate mortgage who is tired of dealing with fluctuating interest rates?

If this describes your situation, "you may want to consider switching to a fixed-rate mortgage to give yourself some peace of mind by having a steady interest rate and monthly payment," notes the Federal Reserve's mortgage refinancing guide. "You also might prefer a fixed-rate mortgage if you think interest rates will be increasing in the future."

And as we just mentioned, the MBA does forecast a rate increase at the end of the year, which means the time for switching to a fixed-rate mortgage might not get much better than now.

What's the consequence of not refinancing to a fixed rate? "If you decide you want to stay in the home after the rate adjusts, you might have to pay higher rates," Stanisch says.

Reason #3: You need extra cash to pay for big expenses

Are huge expenses, such as medical bills or major home improvements, weighing heavily on your mind? If that's the case, you could utilize "cash-out refinancing" in 2013 to help meet important financial needs.

According to the Federal Reserve's mortgage refinancing guide, you can refinance your home for a greater amount than what you owe, and then receive the difference in a cash payment.

"It's a good use in theory if you have the equity to do that," Stanisch says. "Equity is critical."

That's because in order to execute a cash-out refinancing, Stanisch says homeowners ideally need at least 20 percent equity in their home. The U.S. Department of Housing and Urban Development  uses the following example showing 40 percent equity:

"If a home has a current value of $100,000 and an outstanding mortgage of $60,000, the owner could refinance $80,000 and [take out] an additional $20,000 in cash."

[Ready to refinance your mortgage? Click to compare rates from multiple lenders now.]

The cash you receive could then be used to pay for mounting hospital bills, college tuition, or remodeling work that could help increase the value of your home.

Reason #4: Your credit score is in the "excellent" range

The benefits a borrower sees from refinancing a home can depend heavily on his or her credit score, since a higher credit score can mean lower interest rates. And if it appears your score is on the upswing in 2013, it might be time to think about getting a new loan.

"A credit score by itself wouldn't be a driving factor in [refinancing], but it would be a big part of it," Stanisch says. "You might save more money."

FICO scores - developed by the Fair Isaac Corporation - range in value from 300-850, according to myFico's website, the consumer division of FICO. Stanisch says an "excellent" - or optimal - credit score is 740 and above.

So if your credit score has improved since you initially got your loan, refinancing could save you some cash by scoring you a lower interest rate.

Stanisch gives an example: "Let's say you went into an FHA loan because you had a low credit score in the low 600s," Stanisch says. "If you have a better score, you might be able to get conventional financing to save you money. It would have to be a pretty dramatic increase, but, yes, it could happen."