With incredibly low interest rates, many people are asking if now is a good time to refinance their mortgage.
Bridget Jeffries, CCOA’s Director of Counseling, offers the following advice to those looking to refinance.
With the cut to interest rates, it definitely makes sense for a lot of folks to be looking to refinance. Previously the rule of thumb was a consumer needed a 1% reduction of interest rate in order to justify refinance. There are definitely times when the reduction can be less than that and still pay for itself in the long run or help with reductions to monthly mortgage expenses. So to get a clear picture of what you stand to gain from refinancing, first set a goal.
Goal setting to prioritize your financial needs.
Do you need to reduce your monthly expenses? Then consider refinancing to an extended loan term, such as from a 15-year term to a 30-year term. Of course you’ll pay more in interest with an extended term, but the additional cash each month may be worth it depending on your needs.
Do you want to save money on interest? Depending on your situation even a half percentage point might be worth refinancing, but you need to know where you stand. Take a look at your credit as this will impact your rate considerably. The credit bureaus (Experian, Equifax and Transunion) are offering free weekly credit reports through April 2021 at annualcreditreport.com. Take a look and see if there’s anything you need to clear up on your credit record. Also, determine the amount of equity you have in your home. Many lenders require expensive mortgage insurance if you have less than 20% equity, so be sure to include such monthly expenses in the overall savings.
Once you know from your lender what refinancing can do to your rate, use a tool like NerdWallet’s Refinance Calculator to determine how much you’ll save in interest over the life of the loan or how much you’ll save in monthly payments. But even though refinancing can save you money, the benefit to you depends on a few key things.
Determine how much you’ll pay in closing costs.
Fees related to refinancing a mortgage (appraisal, credit check, origination fees and closing costs) are notorious for consuming your overall savings. Be sure to ask what to anticipate on these charges before you begin the refinance process.
Consider how long the home has been or will be yours.
If you’ve had the mortgage for a while, you may be able to refinance now to a new 15-year loan. This new term could have a lower interest rate than a 30-year loan allowing you to reduce your monthly payment and also reduce the number of years remaining on your mortgage. But if you’ve been in the home only a short time, you’ll need to do a little math be sure the overall savings make sense for the time you think you’ll be in the home. When I counsel folks looking to refinance, we will take the overall savings in interest and divide that by the loan term ($3000 in savings / 15 years = $200/ year). Then we look at how long it will take to pay for the estimated fees to refinance. This usually gives someone clarity on whether or not refinancing will help improve their financial position.