Maybe you’ve considered refinancing your mortgage, but you’ve only dipped your toe in the exploratory waters. Is now the right time? Will rates stay low? Or will they go lower?
If you’re wondering to yourself, “Should I refinance my home?”, you’re asking the right question. Still, it can be hard to know when to take the plunge.
Whether you’ve purchased a home recently or bought a home years ago, you’ve probably noticed: Average mortgage rates continue to hover near historic lows.
But as with any financial rate or data point, it is hard—if not impossible—to time the market or predict the future. This makes it hard to know if it’s the right time to dive in and lock in a lower rate.
Here’s what we do know: As recently as late 2019, the Federal Reserve signaled that they will keep the federal funds rate steady for now .
Knowing that mortgage rates are currently on the lower end of the historical spectrum, one good idea is to research your options to see if refinancing your mortgage is worth considering.
Refinancing is the process of paying off a mortgage loan with new financing, ideally at a lower rate or with some other, more favorable, set of terms.
Often, homeowners look to refinance when it could benefit them in some way, like with a lower monthly payment. Here are seven signs that locking in a lower mortgage rate now could be the right move.
1. You Can Break Even Quickly
Refinancing a mortgage costs money. So, if you are refinancing to save money, you’ll likely want to run numbers to be sure the math checks out. You can do so by comparing the costs involved with refinancing and the expected savings on your monthly bill.
To calculate the breakeven point on a mortgage , divide what it costs to refinance (e.g., origination fees, closing costs, etc.) be sure that you do not include any prepaid type costs that are a part of your regular monthly mortgage payment such as daily interest, taxes, insurance. Once you identify the true hard costs and divide them by your estimated monthly savings, you can see the amount you’ll be saving each month.
For example, refinancing a 30-year $1 million loan from 7.5% to 4.5% would result in savings of approximately $1,925 per month. If the cost of the refi is around $20,000, the amount of time it would take to break even would be just over 10 months ($20,000 / $1,925 = 10.39).
Quick tip: origination or discount fees can sometimes be the highest cost in a mortgage refinance.
Rate and fees usually work in tandem. The lower the rate, the higher the cost (buying your rate lower by paying extra fee in the form of discount points). Or maybe rates are low enough where you can still lower your rate by choosing to take a little higher rate and get rebate money back from that rate to cover your closing costs for a no cost type loan.
Request several quotes from your chosen lender such as zero points, discount fee to buy the rate down, and rebate no closing costs options to see which scenario works best for you.
Moving soon? Maybe the rebate rate is an option to consider.
Keeping the loan and the home for a while? Maybe paying some in discount fee works out best in the long run. Using a mortgage calculator and/or an amortization schedule calculator to run different loan scenarios can be helpful.
2. You Can Reduce the Rate on Your Home by at Least .5%
You may have heard conflicting ideas about when you should consider refinancing. The reason is that there is no one size fits all as individual loan scenarios and goals can differ. One commonly espoused rule of thumb is that the home refinance rate should be a minimum of 2% lower than an existing mortgage. What may work for each individual depends upon things like loan amount, interest rate, fees and more.
However, the combination of both larger mortgages and banks offering lower closing cost loan options has changed that. For a large or jumbo mortgage, even a change of .5% could result in significant savings; especially if you can avoid or minimize the amount you pay in lender fees.
Still, you’ll want to run the calculations to make sure that you can break even on a timeline that works for you, knowing that everyone’s situation will be unique.
3. You Can Afford to Refinance into a 15-Year Mortgage
When you refinance a loan, you are getting an entirely new loan with new terms. Depending upon your loan eligibility options it is possible to adjust aspects of your loan beyond the interest rate, such as the loan’s term or the type of loan (fixed versus adjustable).
If you’re looking to save major money over the duration of your mortgage loan, you may want to consider a shorter term, such as 15 years. Shortening the term of your mortgage from 30 years to 15 years will likely cost you more on a monthly basis, but it could save thousands of dollars (or more) in interest payments over the life of the loan.
For example, a 30-year $1 million loan at a 7.5% interest rate would carry a monthly payment of approximately $6,992 and a total cost of around $1,517,172 over the life of the loan.
Refinancing to a 15-year mortgage with a 5.5% percent rate would result in a higher monthly payment of approximately $8,171, but the shorter maturity results in a total loan interest cost of around $470,750 – an interest savings over the life of the loan of about $1,046,422 versus the 30-year term.
4. You’re Interested in Securing a Fixed Rate
Borrowers may take out an adjustable-rate mortgage because they may get a lower rate of interest (at least initially) than on a fixed-rate mortgage for the same property. But just as the name states, the rate will adjust with market fluctuations.
Typically, ARMs for 2nd mortgages such as Home Equity Line of Credit are “pegged” to the prime rate, which generally moves in lockstep with the federal funds rate. First mortgage ARM rates are tied more closely to mortgage backed securities or the 10 year Treasury Note.
If rates move lower when your ARM rate is up for adjustment, having an ARM may be beneficial to your rate and therefore, your monthly payment. Even though ARM loans come with yearly and lifetime interest rate caps, if you were to believe that interest rates were to move higher in the future, and you plan on keeping your loan for a while, you may want to consider a more stable fixed rate.
Refinancing to a fixed mortgage can protect your loan against rate increases in the future and provide the security of knowing how much you’ll be paying on your mortgage each month—no matter what the markets do next.
5. Or Consider an Adjustable Rate Mortgage (ARM)
You may also be considering a move in the other direction—switching from a fixed-rate mortgage to an adjustable-rate mortgage. This could potentially make sense for someone with a 30-year fixed loan but who plans to leave their home much sooner.
For example, you could get a 7/1 ARM with a potential lower interest rate for the first seven years, then the rate may change once a year when up for review as the market changes. If you plan to move out and move on before higher rate changes, you could potentially save money.
Do your due diligence before going this route. Know exactly when the rate and payment will adjust, and how high. Be certain to understand the loan’s margin, index, yearly and lifetime rate caps and payments.
6. Considering a“Cash-Out” Refinance and Use the Money to Pay off Other Debts
In addition to updating the rate and terms of a mortgage loan, it may be possible to do what is called a “cash-out refinance.” With a cash-out refinance, you take out a new loan at a higher loan amount by tapping into the available equity you’ve built up in your home.
The bank will provide you with cash and in exchange will increase your loan amount which will likely result in a higher monthly payment. Cash back on these types of mortgages have been used for a variety of things such as home improvement, college tuition or debt consolidation. If you go this route, do so with caution.
You are taking on more debt and using the equity you have built up in your home. Market value changes may result in a loss of home value and equity. Also, a mortgage loan is secured by your home, which means that the bank can seize the property if you are unable to make mortgage payments and go into loan default
Therefore, you’ll want to do so strategically. Doing a cash-out refi may make sense if you can use it as a tool to pay less in interest on your overall debt load. Use the cash from the refinance to pay off debts carrying higher rates, like credit cards.
Ideally, depending upon loan terms and other factors, lower rates may allow for overall faster repayment of your now-consolidated debt balance.
7. Your Financial Situation Has Improved
When putting together an offer for a mortgage, a lender will often take multiple aspects into consideration. One of those is prevailing interest rates. The other is your personal financial situation, like your credit history, credit score, income, and debt-to-income ratio.
Although generalized, the better your personal financial situation in the eyes of the lender, the more “creditworthy” you are—and the better terms your loan offer could be.
This may come in the form of a lower interest rate. Therefore, it may be possible to refinance your mortgage loan into better terms if your financial situation has improved since you took out the original mortgage loan, especially when paired with relatively low market rates.
If the prospect of a lower interest rate or loan term excites you—good! Locking in a lower rate now could help you achieve your long-term goals by shoring up cash for other stuff, like retirement, kid’s college, or a big vacation to Greece.
Sometimes, folks spend so much time sweating the small purchases (like the dang lattes) when really, it’s the big money moves—like refinancing—that can make the biggest difference over time.
For some homeowners, a mortgage refinance can be a worthwhile move; one that could potentially save money off the monthly bill, or over the life of the loan. To be sure, you’ll want to calculate the savings—using a mortgage calculator can help.
While it is impossible to know what will happen with mortgage rates in the future, rates are currently holding steady in the lower ranges. For some, this may be a signal that it is a good time to research refinance options. Refinancing may not make sense for everyone, but doing the research will cost you nothing but time.
If you’re interested in researching a refinance, you may want to look for a lender that’s offering competitive rates, no hidden fees, transparency, and great customer service. Then, let the refinance do the money-saving work for you.
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