Is It Time to Refinance My Mortgage?
As with most personal finance matters, refinancing your mortgage is an individual decision. If you’re considering a change, be sure to take into account all of your unique circumstances – don’t simply get hung up on rising or falling interest rates.
There are important pros and cons to weigh before committing to refinancing your mortgage. Advantages include scoring a lower interest rate, building more equity in your home, boosting your overall net worth, and improving your short-term cash flow. While these are significant, don’t forget about the flip side of the coin: You’ll face closing costs on the new loan, and you could end up losing equity on a cash-out refinance.
How Much Lower Are the New Rates?
You’re refinancing to save money. There’s really no other reason. So before you go through the effort, be sure that you’ll actually save money. Don’t simply assume that a drop in rates is a bonus – make sure the drop is substantial enough to make it worth your while.
Consider the following elements of refinancing:
- Refi Guideline: A general refinancing guideline is that the loan should reduce your current interest rate by at least 1%. But keep in mind that the rates will affect different mortgages very differently. Lowering your rate by 1% will have a lot deeper cut if you have, say, a $500,000 mortgage rather than a $100,000 mortgage.
- Reduced Loan Term: If you’re comfortable with your current monthly payment and instead look for long-term savings as your goal, you might be able to reduce the loan term if interest rates have fallen significantly. You may find you can switch from a 30-year to a 15-year fixed-rate mortgage, for example, with only a minor increase to your monthly payment.
- Converting to Fixed Rate: If you have an adjustable-rate mortgage (ARM), a period of low or falling interest rates could be a good time to convert to a fixed-rate mortgage. You can lock in a low rate and be confident that your rates won’t go up, even if market conditions worsen.
What Are the Closing Costs?
When you first bought your home, you likely spent a good deal of time signing a bunch of documents – and a good chunk of money on closing costs before you received the keys to your new property. Refinancing includes all the same documents and closing costs. There are charges for title insurance, attorney’s fees, an appraisal, taxes, and transfer fees, to name a few. And these refinancing costs can range from 3% to 6% of the loan principal.
Ask your lender about these elements:
- Breaking Even: If the monthly savings on your new mortgage won’t be greater than the closing costs, refinancing is not a sound financial choice. Additionally, if you don’t plan to stay in your home for more than a few years, you might never recoup these costs.
- Absorbing Costs: You might have the option to roll the closing costs into your mortgage rather than paying them outright. This sounds like a convenient choice, but keep in mind that you’ll have to pay interest on them which means it will take longer to break even.
- Know in Advance: Always ask about the refinancing fees upfront. And always verify that you are working with a qualified lending establishment. Predatory lenders have been known to throw in unnecessary or inflated fees, and they may not reveal some of these costs during the process.
With a solid refinancing loan, you’ll spend less on interest and likely pay less each month on your payment. That’s more money to squirrel away for retirement, invest for a long-term financial goal, or ease your day-to-day financial pressures. If you’re considering refinancing your mortgage and still have questions, contact American Credit Foundation. We’ll put you in touch with a friendly team member who can walk you through the pros and cons and help you decide if it’s right for your situation.