Q: I’ve heard that mortgage rates have dropped dramatically since the start of 2019. Should I refinance my mortgage loan to take advantage of these lower rates?
A: Refinancing a mortgage is essentially paying off the remaining balance on an existing home loan and then taking out a new mortgage loan, often at a lower interest rate. It may sound like a no-brainer, but there are many factors to consider before moving forward with a refinance.
Is it a good time to refinance?
Mortgage rates have been falling steadily over the last few months. During the last week of March this year, rates took their biggest one-week nosedive in more than a decade, and mortgage applications rose 39%, as thousands of homeowners sought out their lenders for a refinance.
However, the downward trend has already reversed as of the beginning of April, when rates hit 4.29 percent. That’s up from 4.17 percent just one week prior. If you’re thinking of refinancing in the near future, it’s best to do move quickly so you can lock in the lowest possible rate. You may be able to save hundreds of dollars a month if you refinance a loan that currently has a relatively high interest rate.
Is a refinance right for you?
While this is definitely an excellent time to take out a new mortgage, that doesn’t mean a refinance is the right fit for everyone.
Here are two reasons a refinance might be a good fit for you:
1. Your credit is strong and you’d like to lower your monthly payments
The first, and most obvious, reason homeowners refinance their mortgage is to take advantage of a lower interest rate. The drive behind this reason might be a change in finances, personal life or simply the desire to save money. As mentioned, the current mortgage rates make this an excellent time to refinance into a lower interest rate.
Don’t try a refinance unless your credit is in good shape, though. Taking out another mortgage with a less-than-desirable credit score can mean getting hit with a high interest rate, even if national rates are dropping.
Aside from reducing your monthly payments, a lower interest rate can also help you build more equity in your home sooner.
2. You’d like to shorten the life of your loan
People sometimes choose to refinance their mortgage because they want to finish paying off their loan sooner. If you have a mortgage that has a really high interest rate but you can easily meet these payments, consider refinancing into a shorter-term option. You may be able to pay off your loan in half the time without changing your monthly payment much at all.
When refinancing your mortgage is a bad idea
In the following three circumstances, refinancing your mortgage may not make sense.
A. You’re in debt.
If you’re looking for the extra stash of cash each month to pull you out of debt, you probably shouldn’t be refinancing. Most people who refinance for this reason end up spending all the money they save, and then some. Without making any real changes to your spending habits, giving yourself extra money is only enabling more debt. While the intention is rooted in sound logic, unless you make an equally sound change in your spending habits, you’ll be right back to your present situation in very little time.
B. A refinance will greatly lengthen the loan’s terms.
If you’ve only got 10 years left on your mortgage and you want to refinance to stretch out those payments over 30 years, you won’t come out ahead. Any money you save on lower payments will be lost in the cost of the refinance and the extra 20 years of interest you’ll be paying on your mortgage.
C. You don’t plan on living in your home much longer.
If you plan on moving within the next few years, the money you save might not even come close to the costs of a refinance.
How much will it cost?
Homeowners are often eager to get started on a refinance until they see what it will cost them.
Remember all those fees and closing costs you paid when you first bought your house? Prepare to pay most of them again. Broker fees will vary, but a typical refinance will cost anywhere between 3-6% of the loan’s principal.
Before proceeding with your refinance, make sure you’ll actually be saving money. You can do this by procuring a good faith estimate from several lenders. This will get you your projected interest rate and the anticipated loan price. Next, divide this price by the amount you’ll save each month with your anticipated new rate. This will give you the number of months that will have to pass before you break even on the new loan. If you don’t plan on staying in your home for that long, or you can’t afford to wait until then to recoup your losses, refinancing may not make sense for you.
Rates are still low, and if your finances are in good shape, a refinance can be a great way to put an extra few hundred dollars into your pocket each month. If you’re ready to talk to a home loan expert about refinancing, contact Day Air Credit Union today and to ask about getting started on your refinance. We’re always happy to help you save money!