Interest rates remain extremely low, which makes now a good time to consider refinancing your mortgage if you haven’t already done so in the past few years. Refinancing can be a good option for those that:
- Own at least 20% equity in your home
- Have good credit
- Acquired the mortgage when interest rates were higher.
In addition to lowering interest rates, financial challenges due to the Covid-19 pandemic have made lowering monthly payments or taking out some cash an attractive option to those that have experienced financial difficulty recently.
Questions to ask before refinancing:
- Will I be able to lower my interest rate by refinancing?
For most borrowers, if you financed your home prior to the start of the Covid-19 pandemic you may be able to get a lower interest rate now. Changes to your credit or income can also impact your interest rate.
- Will the reduction in the interest rate more than offset the closing costs?
If refinancing only affords you a modest reduction in your interest rate, the closing costs involved can end up costing you more than your savings on interest.
- How long do I plan to own the home?
Oftentimes, if you may be in the home less than 5 years, it makes sense to keep your current mortgage and avoid the closing costs and hassle of a refinance. The longer you plan to own the home, the more sense it makes to refinance.
- What are my goals – lowering my monthly payment, lowering my lifetime interest costs, removing PMI, or taking out cash?
While saving on interest is the most common reason to refinance, it is not the only one. Seeking a lower monthly payment or withdrawing cash from the equity in your home can be other reasons to refinance.
If you are still paying Private Mortgage Insurance (PMI) on your mortgage, this could potentially be removed by refinancing if your equity now exceeds 20%. This can be a big added savings on top of the other benefits of refinancing. Refinancing is not the only way to remove PMI, so consider your current loan and overall goals when selecting the right loan for you.
Other important considerations
Consider the term of your mortgage
Don’t get caught up in just looking for the lowest interest rate, or the lowest monthly payment. Let’s say you are looking for a low monthly payment and have 17 years left on your mortgage. If you refinance to a 30 year mortgage – you are tacking on 13 more years of mortgage payments. Of course your monthly payment will be lower if you refinance to another 30 year mortgage, but do you want to be paying on your mortgage for another 30 years? Keep in mind when you plan to retire and the extra interest costs of paying a mortgage over a longer period.
On the flip side, don’t get caught up in just looking at reducing your interest rate. Likely the lowest rate you can get is on a 10-year mortgage. However, if refinancing to a 10 year is going to increase your monthly payment to a point that will make it difficult to afford the payments, it is not the right option for you.
Remember that refinancing a mortgage is not free. Some lenders may advertise “zero closing cost” mortgages, but these loans typically come with a higher interest rate than a loan with closing costs. The mortgage company is going to make money one way or another. If it’s not on closing costs, they will profit from offering a higher than market interest rate to make up the difference.
Apples to apples comparison shopping
Mortgage “points” can make comparing different offers challenging. Essentially, “Mortgage points” are an up-front cost you pay to reduce your interest rate. You should expect a mortgage that is charging points to have a lower interest rate. To compare apples to apples, look at what the interest rate would be for loans with no points (or the same amount of points).
Is the lender local or national? Refinancing a mortgage entails a significant amount of paperwork. It is a plus to work with a local lender that knows your market and can provide assistance in filing records with the county, finding a title company, providing notary services for documents, and recommending a property inspector if necessary. If you are working with a national lender, make sure you have these services lined up and are comfortable with the local providers you choose.
Still not sure if refinancing is right for you? Download our free guide here to help you decide.