Refinance While You Can

Should you refinance your mortgage? Interest rates are trending up, but they’re still at historic lows. If your current mortgage interest rate is higher than the current rate, then you should absolutely refinance your home loan. Another reason to refinance now is to change the terms of your loan. Maybe you’re in a 30-year loan but want a shorter term or your thinking about saving interest and jumping into a flexible rate versus a fixed rate.

Some homeowners might want to access equity to pay off other high-interest loans or reduce or eliminate credit card debt. You might want to remodel or add on to your home and accessing your home’s equity is a smart way of reinvesting in your home and yourself.

Lower Your Interest Rate

When mortgage interest rates drop, it’s smart to consider refinancing since you can lower your monthly house payment, reduce the term of your loan, or lower the total interest you pay on the entire loan. Lowering your monthly mortgage payment allows you to pay more on your principal balance or sock the money away for a rainy day.

Every percentage point of interest raises your monthly house payment roughly 10%. A $250,000 mortgage at 5% translates to a $1428 monthly payment and at 6%, your payment rises to $1553. If you find an interest rate that’s at least 0.5% lower than your current rate, it’s worth it to consider refinancing. If you find the benefit of a lower monthly house payment or a better loan term more than offsets the cost of closing, then jump into a new mortgage on your home.

Weigh Your Options

Even though mortgage interest rates are still low, and you can save on your monthly payment, there are other benefits to consider when refinancing:

• Shorten your loan term. You can potentially save tens of thousands of dollars over the life of your loan by refinancing for a better rate, so why not consider a shorter term to pay off your house faster? If you’re planning to stay in your home longer than 7-10 years, paying down on your principal puts more cash in your pocket when you eventually sell your home.
• You’re looking for a different loan type.  Maybe you have an adjustable-rate mortgage and you’d be more comfortable with a fixed rate. Or maybe your loan is an FHA loan and you don’t want to continue paying mortgage insurance premiums.
• You want to access your home’s equity. Have you been in your home for a few years? If you’d like to remodel, repair, or add on to your home, cashing out your equity is a smart way to finance those projects without taking out high-interest loans.

You Don’t Have To Refinance

Even if interest rates are low, there are a few good reasons to sit on your current mortgage:

• You’re planning a move. If you’re not planning to stay in your current home for more than another three years, sit on your mortgage. Closing costs can be significant, depending on the bank and the loan. Application fees, attorney fees, appraisals, title fees, and insurance costs all add up to an average closing cost of $5000. In order to offset the expense of refinancing versus the benefit of a lower monthly payment, you’ll want to stay in the home for a least a couple of years.
• If you’ve been in your home a while or have paid down significantly on your principal balance, you might want to continue paying on your current loan. You might not gain much benefit from refinancing if your loan balance is already low.
• You’ll need a decent credit score to successfully refinance your home. If you lost your job or have otherwise been late on payments, you might not qualify for the best rates. It’s always worth it to investigate, but it may be wise to sit on your current loan for a while longer while you improve your creditworthiness.

The Bottom Line

There’s no guarantee that mortgage rates will remain low. You have time to consider, so start reviewing your options. Pull out the old pen and paper if you need to and start writing down benefits and drawbacks to refinancing.

Whatever your reasons for refinancing, now is the time to do it. Rates are rising and while they’re still low, they will continue to climb. If you’re thinking about refinancing your home, mortgage rates are still at historic lows, so contact your lender soon to take advantage of the best interest rates and mortgage terms.