Have you been monitoring the current interest rates for home loans? Whether you have or haven’t, I’m here to tell you that they are low! Just a year ago I heard over and over again that rates were expected to jump up. Well, the very exact opposite happened (thanks to China trade wars and an anticapted Federal Rate cut). Rates are about 1% lower than late last year in 2018. I was expecting rates to go up in the 5% range in 2019 and now instead, we are seeing rates in the 3’s! It’s also predicted that the Fed will be cutting the federal funds rate on Sept 18th which trickles down to impact mortgage interest rates. So the question becomes, should you refinance your mortgage? The answer: it really depends on your specific situation. Here are a 3 things to consider when it comes to refinancing:
How Long Will You Live in Your Home?
If you think you’ll only be in your house for a few more years, it won’t make sense to refinance. Remember that when you refinance, you have to pay fees to the lender (just like you did when you originally established your home loan). Even though you may have a lower monthly mortgage payment of a couple hundred dollars, you also have to remember the upfront closing fees (which can add up to $3-5K) won’t be recouped for several years.
How Many Years Are Left on Your Current Loan?
Refinancing may be the most advantageous for those that have purchased in the last 1-2 years (but you still also have to consider other the other factors I mention too!). If you have already been paying off your loan for many years, it may not be worth refinancing. Remember that refinancing re-sets the clock. So if, for example, you are 10 years into your 30 year mortgage and decide to refinance, you then start paying interest on another 30-year loan. Lowering your monthly mortgage bill by adding on extra years of your payment could result in paying more interest in the long-run! It could be advantageous to switch from a 30 to a 15 year loan in some instances, but you really just have to do the math for your own situation to decide.
What Is The Cost To Refinance?
Just remember that refinancing your mortgage is not free. It’s typical for refinancing to cost around 2% of the remaining mortgage balance. So if you have $338,000 left on your mortage, expect to pay around $6,000 in closing costs. Now let’s do a little math. Let’s say you have a 30 year mortgage on a $350,000 loan and have already paid down $12,000 of that in 2 years at an interest rate of 4.5%. Your current monthly payment is $1,773. If you refinance to a new 30 year loan at a rate of 3.75% on the remaining balance of your loan (now $338,000), your new monthly payment is $1,565 (a cost savings of $208/month). It will take you just about 2.5 years to recoup this cost ($6,000 fee/$208 monthly savings). That’s a pretty quick recovery time as long as you were not planning on moving anytime in the near future. But if you were planning to move in the next 3-4 years, the cost savings would be pretty minimal and may not be worth the headache and expense.
As I mentioned, determining whether you should refinance or not really depends on your unique situation. My advice is to consult with a trusted lender and have them spell out the costs for you. Also take into account your lifestyle and what you plan to do in your home (remain in it long-term or sell in the near future). I have some great local lenders that I know and trust and am always happy to refer you to them if you want to explore it more.