With interest rates so low, you may be asking yourself if now is the time to refinance your home mortgage. The short answer is – that depends. While low interest rates are certainly the biggest motivator for doing so, you shouldn’t let that alone dictate your decision to refinance.
The whole point of refinancing is to save money in either the short- or long-term, or both. When homeowners refinance, it is because they will secure a lower monthly payment, a lower interest rate, a shorter loan term, or some combination of all of these.
Carefully Do the Math on Different Refinancing Options
To determine if now is the right time for you to refinance, there are a few questions you need to answer before you rush over to the bank and start the refinancing process.
● Are you paying extra fees on your loan? If so, refinancing may be a good option for you to lower your monthly payment. For example, if you are paying private mortgage insurance (PMI) each month or mortgage insurance premiums on a FHA loan each month, it is worth running the numbers to see if you have enough equity built up to cancel those fees through refinancing.
● Will your interest rate go down by at least 0.5 percent? That’s the most common rule of thumb for determining when to refinance. With a lower interest rate, you will pay less interest over the life of the loan, potentially saving you thousands of dollars.
● Can you shorten the mortgage term and still afford the monthly payout? With lower interest rates also comes the opportunity to shorten the loan terms, which will save you money in the long run. But monthly costs often go up when terms are shortened.
● Can you pay cash for closing costs? Closing costs will run between 2 percent and 6 percent of the final loan amount. In order to save money, the savings from a lower interest rate cannot exceed the closing costs.
● Do you need a cash infusion? If so, cashing out your home’s equity may be the best way to go when interest rates on mortgages are so low, but only if you have at least 20 percent equity remaining after the transaction. This may be something to consider as a way to get the cash to pay the closing costs on the refinanced mortgage.
After running the numbers on some or all of these scenarios, you should have a definitive answer on whether or not refinancing will save you money. If it will, then it may be worth doing.
Tips to Help You Decide if You Should Refinance
Refinancing your mortgage is a big decision. Here are some tips to help you along the way.
● Tip No. 1: Shop Multiple Lenders. You are not obligated to refinance through the same bank who holds the first mortgage. Different banks will offer different rates for different loan terms. It may only be a fraction of a percentage point, but every little bit of savings makes a difference in the long run. A general rule is to shop at least three banks.
● Tip No. 2: Don’t Extend Your Loan Term. If you have already paid out six years of a 30-year mortgage, refinancing for another 30 years to get a lower interest rate will cost you more in the long run.
● Tip No. 3: Improve Your Credit Score. Your credit score plays a pivotal role in the interest rate you secure. The higher it is, the lower your interest rate will be. It may be worth holding off on refinancing while you spend a few months trying to raise your credit score.
Any decision to do with your home is a big one. Refinancing is no exception. Be sure to carefully weigh all options and run all calculations multiple times to make sure that refinancing makes good financial sense.