Is this the right time to refinance your mortgage?
Has it been a few years since you’ve closed on your home? You may want to take a closer look at current mortgage interest rates and your existing home loan. Chances are strong that rates may have dropped enough since you last closed to warrant a refinance of your mortgage — a move that could save you possibly hundreds a year and many thousands over the life of your loan.
“With interest rates hovering near historic lows, now is a great time for borrowers looking to refinance their current mortgage. Lower rates can result in significantly decreasing your monthly payments,” explains Cathy Maloney, vice president of mortgage lending for Guaranteed Rate in Parsippany, New Jersey.
Ponder that, since the start of 2019, national average 30-year mortgage rates have fallen from nearly 5% to 3% or lower, per Freddie Mac. At the time of this writing, the average 30-year fixed rate was 2.99%. That’s a tantalizingly low number that can motivate homeowners currently with rates in the midto upper-3% range or higher to take action.
A general rule of thumb is that if mortgage rates are lower than your current rate by 1% or more, refinancing is a financial no-brainer; but even dropping your rate by 0.25% to 0.5% could pay dividends.
Albert Chavez, a mortgage loan consultant with Sacramentobased United Wholesale Lending, recommends considering a refi if you currently have an interest rate higher than 3.125% and don’t plan on moving anytime soon.
“Refinancing could save you hundreds of dollars per month,” he says. “The average savings I’m seeing for clients
who refinance into a new 30-year fixed-rate loan are $270 to $525 per month. Others are shaving an average of eight years off their current term.”
Indeed, lower monthly mortgage payments aren’t the only reason borrowers pursue a refi. Many seek to pay off their loan sooner by choosing a shorter term — such as going from a 30-year loan to a 15-year loan, which can generate tens of thousands in savings over the loan’s life.
“Others refinance, assuming they built up enough equity, to eliminate mortgage insurance that up to this point has been required by their lender,” Maloney adds. “Many borrowers find that their home has increased in value, possibly allowing them to take cash out when they refinance to pay for a home improvement project, pay down debt or fund a major purchase. And others switch from an adjustable interest rate to a fixed-rate loan, which provides stability in future payments.”
The best way to determine if a refinance is right for you at this time is to crunch the numbers carefully.
“Closing costs usually range from 2% to 5% of the loan principal, which means they generally average several thousand dollars,” says Peter Zomick, senior director of consumer direct lending for Silverton Mortgage in Charlotte, North Carolina.
If you are aiming to lower your payments, you need to determine your closing costs and break-even point, suggests Elizabeth Whitman, an attorney and real estate broker in Potomac, Maryland, who suggests the following scenario:
Say you currently owe $200,000 on a mortgage loan with a 4.0% fixed interest rate. You opt to refinance at a 3.0% interest rate, which will set you back roughly $5,000 in closing costs (2.5% of your mortgage loan amount). The difference between these two interest rates will save you 1.0% interest annually — equating to about $2,000 per year. So, you would need to remain in the house for at least 2.5 years to cover the $5,000 closing costs (the breakeven) on this transaction.
“In this example, if you expect to stay in the house for several years, this refinance makes sense. But if you plan to move in two years, it probably isn’t a good idea,” Whitman notes.
Worried that you may not qualify for the lowest interest rate possible?
“Take the time to check your three free credit reports, at annualcreditreport. com, and your credit score, through your bank or credit card, to see if there’s room for improvement. A few quick fixes may help you secure the best possible rate for your refi,” advises Anthony Sherman, CEO of New York City-headquartered Simplist.
The good news is that if your credit score has improved since you last closed on your home, “you may find yourself eligible for a more attractive interest rate,” Sherman points out.