What You Should Ask Before You Refinance Your Mortgage
This time last year, economists predicted that rates on a 30-year mortgage would hover at 5.1 percent in 2019. Instead, mortgage rates steadily declined to a three-year low in September, fueling an increase in the number of people refinancing. In fact, more people refinanced this year than in the last three years combined. Last month (November 2019), the average 30-year mortgage rate had fallen to 3.75 percent— offering recent home buyers a chance to lock in even lower interest payments.
Refinancing can lower your monthly payment and save you a large sum of interest money over the life-span of your loan. However, it is not always a no brainer. Such calculations rely on assumptions such as how long you plan to stay in your home. Before you commit to a decision on whether or not you should refinance, here are a few things to consider.
1. What Is Your Goal?
Make sure that the new loan will help you achieve your long term goal. If rates have dropped or your credit score has improved since you took out your original loan, you could save tens of thousands of dollars by refinancing. But make sure to pay attention to the fees and total interest, not just the rate. Some people use what's called a “cash-out’’ refinance to access home equity, essentially taking out a bigger mortgage and pocketing the difference to pay for a remodeling project or other expense. If you opt for a cash-out refinance, make sure it closes before you begin construction.
2. It Costs Money To Save Money
Taking out a new mortgage is expensive. Take into consideration that closing costs on a refinance loan will be comparable to what you paid the first time around. The best way to estimate closing costs for your specific property is to pull out your existing loan’s “closing disclosure’’ form. This details each of the fees the borrower paid to get the existing loan. If you had a positive experience working with your current lender, ask their advice. They may be able to offer you a "streamlined" refinance because they already have your information on file. This can be as easy as signing a new document.
3. Do You Want To Pay Off Your Mortgage Early?
Refinancing into a shorter-term loan can help you pay off your mortgage faster. If you are most interested in paying off your mortgage as fast as possible, you can take whatever savings the refinance yields and use some or all of it to make an additional payment toward your principal each month. These are approximate numbers, but an extra $100 applied to the principal each month will reduce the term of the mortgage from 30 to 27.9 years.
4. What’s Your Time Frame?
Remember that the more your loan costs in fees, the longer you’ll have to stay put to break even. This is something to take into consideration when thinking about how long you plan to stay in your home. If you’ve realized that you’re in your forever home — or, at least, your 30-year home — paying more to lock in a lower rate will generally be money well spent.
The Bottom Line
No one knows whether rates will rise or fall, so don't go chasing rates. Know the rate that makes your refinance make sense for your situation, and when it becomes available, grab it.
