Is Now the Right Time to Refinance Your Mortgage?
Monday, May 4, 2020
You’ve probably heard that mortgage rates have hit historical lows due to current economic conditions. That news may leave you asking yourself, is now the right time to refinance. While a lower rate is tempting, there are multiple factors you should consider before deciding to refinance your home.
How long do you plan to stay in your home?
If you’re planning to stay in your home a while, now may be a great time to refinance. When you refinance your mortgage with a lower interest rate, you could lower your monthly payments and save money over the long term. When refinancing, you’ll pay closing costs (average of 2% to 5% of the loan amount), but over the long term, you’ll recoup this money. For example, say that you refinance at a lower interest rate that saves you $200 per month and you paid $4,000 in closing costs. After 20 months, you’ll have already recouped the closing costs as a result of the lower interest rate.
How much equity do you have in your home?
The amount of equity you have in your home may make a difference in your closing costs and rate. Lenders will look at your loan to value (LTV) which is simply how much you owe vs. what your home is worth. To get the very best interest rate and lower closing costs, the lender may want you to be at an 80% LTV or less.
If you put less than 20% down when you purchased your home, there’s a good chance your lender required you to have mortgage insurance, which costs you each month. Depending on the amount of equity you have in your home, you may be able to refinance into a new loan that doesn’t require mortgage insurance. If you don’t want to refinance, but think you’ve built up enough equity to have the mortgage insurance cancelled, talk to your current lender about your options.
How low should the rate be before I refinance?
Many experts will tell you it’s worth refinancing if you can get a mortgage rate that is 1% or more less than your current rate. While this may be true in some cases, there are other factors to consider. The reduction in rate will greatly depend on how much you owe – if you have a large balance remaining, saving less than 1% might still be a good deal while if you only owe a small amount, it may only be worth refinancing if you can save 2% or more. It’s a good idea to run your scenario through a mortgage refinance calculator to ensure it makes sense.
Be cautious when it comes to ads that promote exceptionally low rates.
So you’re considering refinancing and you see an ad promoting a rate of 2.75% for a 15-year mortgage, for example. Your current rate on a 30-year mortgage is 5.25%, so immediately you think this is a great offer. Before you start your application, be sure to read the fine print or contact the lender advertising the rate to see what's required to get the advertised rate. There may be credit score and LTV minimum requirements or additional fees and conditions associated with getting that rate.
How much will it cost me to refinance?
You can expect to pay closing costs if you decide to refinance. On average, closing costs are around 2% to 5% of the loan amount. These closing costs may include origination fees, appraisal fees, title fees, attorney and recording fees, and flood certification fees. The fees can vary significantly from one lender to another which is why it’s so important to also compare closing costs when deciding on a lender. To see what your estimated closing costs would be with AllSouth, check out our online Loan Consultant.
Going from an adjustable-rate mortgage to a fixed-rate mortgage.
With an adjustable-rate mortgage, after a certain amount of time, your rate could go up or down. While a fixed-rate mortgage provides you with a fixed-rate for the full term of the loan so you don’t have to worry about the rate changing. If you’re planning on staying in your home long-term and have an adjustable-rate mortgage, you may decide to refinance to a fixed-rate mortgage even if the rates the same simply to avoid an increase that could happen later with an adjustable-rate mortgage.
Are there any other reasons I should refinance?
Some homeowners decide to refinance to reduce the term of the loan. Maybe you started with a 30-year mortgage and would like to refinance to a 15-year mortgage. In addition to helping you pay off your mortgage sooner, reducing your term could save you a significant amount of money by decreasing the total amount you pay back in interest. Run the numbers using a refinance calculator to see how much you could actually save by reducing your mortgage term.
Maybe you’re interested in completing some home improvement projects or need extra cash for a large purchase. If you have enough equity in your home, you may qualify for a cash-out refinance. A cash-out refinance allows you to get cash out at the same time you refinance your mortgage. The amount of cash you can take out will ultimately depend on how much equity you have in your home.
Deciding whether or not to refinance your home is a big decision. The good news is that with a refinance, you're just dealing with the mortgage – no moving boxes involved this time. As with any major decision, it’s a good idea to do your research, compare what multiple lenders have to offer, and use mortgage calculators to run the numbers. We have a variety of resources available to help you decide and a team of mortgage experts ready to assist you.