According to Freddie Mac, the national average interest rate dropped earlier this month to 2.98%. This interest rate hits an all-time low record for the past 50 years.
What is refinancing?
Mortgage refinancing is the process of replacing your current mortgage with a new one with different terms and a new interest rate. When you refinance, your old home loan will be paid off in full, so you only are left with the new refinanced mortgage. The application process is like a standard mortgage, you will need to submit financial documents and, in most cases, have your home appraised.
Reasons to refinance
- To save money now. Lowering your interest rate by even one percent could save you thousands of dollars over the life of the loan.
- To shorten the length of the mortgage. Many people look at shortening a 30-year to a 15-year loan because of the lower interest rate that comes with a 15-year loan.
- To drop mortgage insurance. (This is only possible if it is a conventional mortgage.)
- To change loan terms. If you have an adjustable mortgage you may change to a fixed rate.
- To take cash out.
Once you know your reason for refinancing asking the following questions will help you decide if refinancing would be wise for your situation.
What should I consider before refinancing?
- Has my credit score changed since I purchased this home?
To take advantage of today’s low rates you will need a good credit score. Credit scores make a big difference in your interest rate. If COVID or other life changes has taken a toll on your credit score you may want to repair your credit prior to refinancing. Using an online service like credit karma can give you an idea of your score, but a lender will pull your credit through the 3 major credit bureaus and usually use the middle score. Aim for a score of 700 or above.
2. How much equity do I have in the home?
Your equity is the market value of your home minus the amount you still owe. With each payment you increase your equity as well as home improvements and general market appreciation. If you have 20% equity in the home and you have a conventional mortgage you can get rid of mortgage insurance. If you’re not sure if you have the 20% equity, give us a call and we can help you figure out if you have the equity currently. (Our evaluations don’t count for the lenders appraisal, but they can help determine if it is time to spend the money on an appraiser.)
3. What are my closing costs?
How long do you plan on staying in the home? If you plan on moving soon now may not be the best time to refinance. Just like a regular mortgage there are costs involved in refinancing. These costs will eventually be offset but it is important to stay in the same living situation for some time to make it worthwhile.
4. How may years am I into my current mortgage?
When you refinance, your mortgage will reset according to the new terms selected. So, if you have owned a home for 10 years and have a 30-year fixed mortgage, your new mortgage would start over at 30 years, not 20. If you are close to having your mortgage paid off it may make more sense to continue making those payments instead of extending the length of the loan.
5. What is my break-even point?
Refinancing costs thousands of dollars. You may not have to come to closing with any cash, the cost may be rolled into the mortgage but you are still paying for it. Your break-even point is the time that your savings will equal the cost of refinancing. Talk with a lender and get an idea of the cost of refinancing, then compare your monthly savings to see how long it takes to break even. For example, if you are refinancing and closing costs are $6,000.00 and your new payment saves you 150.00 per month, it will take you 40 months for you to break even and make refinancing worth it. Each month after the 40 months represents your true savings. When deciding if a refinance makes sense you always need to calculate how long it will take for the cost of the mortgage refinance to pay for itself.
Is refinancing right for you?