Does refinancing your mortgage make sense?
“Should I refinance my mortgage?” is a question we are often asked by our clients. If you have recently pondered this possibility, now would be a great time to weigh your options. First, let’s take a look at some of the items that impact what kind of mortgage rate you can obtain.
One big driver of the rate you are very likely to receive if you borrow money for a mortgage is your credit score. An individual’s credit score can range between 300 to 850 points. The higher your credit score, the less likely a lender views you as someone who will miss a debt payment or fully default on a loan. An individual’s credit score is impacted by a variety of items, such as the percentage of ontime payments, length of personal credit history, the number of credit inquiries you have had in the last 12 to 24 months, among several other factors. If, for example, you miss a payment on your credit card, mortgage or car loan, it can take years to no longer impact your credit score.
Thus, while your credit score is something you have control over, it cannot be changed quickly. Individuals with credit scores above 750 can expect to get the best rates on a mortgage. Individuals with the lowest credit scores will likely have to pay higher borrowing costs and, in some cases, may not be able to get a loan at all. If you are wondering where your credit score stands, you can check with one of three major credit reporting bureaus, Equifax, Experian or Transunion. Some banks and credit card companies, as well, are now offering free credit tracking features that let their customers check their credit scores. While a lender checking your credit will have an impact on your credit score, inquiring into your own credit score should not carry any influence.
A second driver of the rate you are likely to be offered on your mortgage is your debt to income ratio. Your debt to income ratio is calculated by your income divided by your debt payments. Debt payments include a variety of items, including but not limited to, car payments, mortgage payments, student loan payments and child support. Mortgage lenders like to see a borrower’s total debt to income ratio fall below 36%, and your housing debt to income ratio (mortgage/income) not exceed 28%. Depending on your household cash flow and other expenses, you may not be comfortable with having a debt to income ratio as high as these guidelines. Also, keep in mind, these are maximum guidelines, and there is no debt to income ratio that is too low.
The last and probably most influential item that impacts the rate you are likely to receive on a mortgage is the long-term interest rate environment. Unlike short-term interest rates set by the Federal Reserve, long-term borrowing rates are set in the open market by supply and demand for bonds. Mortgage rates in particular are most closely linked to the market rate of the 10-year Treasury bond. At the writing of this column, the market rate on 10-year Treasury bonds are at historic lows. In fact, on Friday, March 6, 2020, the 10-year Treasury bond yield closed at its lowest level ever of .70%. This is great news if you are looking to borrow money to refinance your current mortgage, and it is why now might be a great time to research this option further.
Thus, if you are considering refinancing your mortgage
what should you do next? First, as with making any major financial decision, you should have a conversation with your financial advisor or financial planner. He or she can help determine if refinancing will make sense for you given your personal situation and total financial picture. Then, if refinancing still seems to make sense, it would be a good idea to reach out to a mortgage broker. Again, your financial advisor may be able to help. Planners generally work with a variety of mortgage brokers nationally and in the local community, including highly respected lenders, making them great resources for a referral to a lender.
At our office, we are emphatically saying that given the current interest rate environment, refinancing may be advantageous. We hope this information helps you determine if refinancing makes the best sense for you.