Is Now the Best Time to Refinance Your Mortgage?
If there’s one word on the mind of every owner and financial planner right now, it’s this: “Refinancing”.
And for good reason. Mortgage interest rates are near historic lows: the average for a 30-year fixed-rate loan was 3.36% for the week ended March 12 according to Freddie Mac. The average rate for a 15-year loan was 2.77% and for a 5-year variable rate mortgage it was 3.01%.
If that rate is much lower than what you are paying now, you can just take out a new loan and save on your monthly nut. A slam dunk, right?
Well, not so fast. While refinance your mortgage is a great idea for many, it may not be right for you – and it all depends on your personal situation. As the old saying goes: just because you can doesn’t mean you should.
“There are some things you need to think about: number one, can you lower your interest rate? Says Ilyce Glink, founder of financial wellness company Best Money Moves. “Number two, can you shorten your loan term? Third, can you reduce your monthly payments? And fourth, can you reduce the costs of obtaining this refinance?
“If you can get it all, it’s a total home run. And if you can get two or three of these, that’s where your personal finances come in, and you need to think about what your best money move is.
If refinancing is right for you, the savings could make a real difference to your bottom line: about 9.4 million borrowers in America could save an average of $ 272 per month if they refinanced at a lower rate, according to the company. Black Knight analysis. “Our clients would be crazy not to call their mortgage brokers and take advantage of these rates,” says Tom Balcom, financial planner in Lauderdale-by-the-Sea, Fla.
Should You Refinance Your Mortgage
So when to sign on the dotted line for a refinanced home loan? Here are some factors to consider:
-Difference in rate. What is the interest rate differential between what you are paying now and what you might get with a new loan? Historically, the general rule of thumb is that a difference of 1% or more is worth refinancing – although nowadays it looks more like 0.5% or more.
For example, if you buy a house for $ 250,000 and pay 20%, and pay 5% interest on the balance for 30 years, that’s a monthly payment of $ 1,632. But with an interest rate of 3.5%, you save almost $ 200 each month.
Of course, we are in a prolonged era of low rates, and you may be one of the millions of homeowners who have already refinanced. In that case, if the rate differential is only a quarter of a point, it might not be worth the hassle, paperwork, and extra costs to start this process over again. Typical closing costs, for example, can be around $ 3,000 to $ 5,000.
– Time at home. Now you need to think about how long you are going to be staying in your current home. If you see yourself being around for a very long time then refinancing at a lower rate may be a no-brainer.
But people are moving all the time – maybe a growing family needs more space, maybe your job takes you to another city, maybe a retired couple is planning to downsize. its workforce. If you plan to sell for the short term, it’s probably not worth refinancing because whatever you save in monthly payments won’t recoup the costs associated with taking out a new loan.
“If it costs you $ 2,000 to save $ 200 per month, then after living in the house for a year, you’ve saved enough to offset the costs, which probably means refinancing makes sense,” says Danielle Hale, Chief Economist for Realtor .com “If you’re not sure if you’re going to be home for long, you might want to wait.”
-Term of the loan. Let’s say you’re already six or seven years away from a 30-year loan. Refinancing for a further 30 years would certainly lower your monthly payments, not only because of a potentially lower interest rate, but because you are extending the term.
But is this really what you want? If your ultimate goal is to live in a paid house then you are delaying this dream.
Another possibility, and judicious if you have the means: take advantage of low rates to change the duration of the loan, and go from 30 years to 15 years. Because of the tight deadline, you might even be paying more on a monthly basis, even though the new rate is lower – but if you have the financial means to do so, that means the house will be yours way sooner than you expected. For near retirees wondering how they’re going to pay for their golden years, this is a huge win.
“If you’re in the last few years to pay off your mortgage, it may be a good idea to take a shorter-term loan when you refinance,” says Hale. “First of all, this will mostly keep you on target with your original payment date. Second, you might see even greater interest rate savings, as 15-year mortgages tend to have lower rates. “
-Compare the offers. National loan averages are interesting, but they don’t mean much in your particular case. Your own loan offers will depend on factors like personal credit history, amount of home equity, etc.
Word to the Sage: Don’t just get an offer from a lender and call it a day. “I would like people to talk to three, four or five lenders,” Glink advises. “Large national lenders, regional banks, credit unions, local mortgage brokers. Nowadays, the internet makes everything so easy.
-Do not think too much about the direction the rates are going. Of course, once you’ve set a new rate and refinanced, the rates might continue to drop and make you wonder if you could have saved even more. With the coronavirus spreading and the Federal Reserve seemingly quick to take action and lower its own benchmarks, it certainly can.
It is a dangerous game to play, however. First, mortgage rates don’t always follow the Fed’s movements. They should drift down with the recent cut, but there’s no guarantee. Second, hardly anyone will plan their new loan perfectly – and individuals are notoriously bad at timing markets anyway.
“My prediction is that the banks will stop lending money soon,” says Glink. “People think rates are going to come down more and more, but they literally can’t. So take a look at your situation, and if it makes sense for you to refinance, don’t even wait – go ahead and do it.