With interest rates hitting all-time lows in 2020, a lot of homeowners have started wondering whether it is a good time to refinance. Generally with very low interest rates, the answer to that question is yes. However, there are some important things for you to think about before you move forward that can impact whether refinancing is the right choice for you. Here are three questions to ask.
1: Why are you thinking about refinancing?
In general you shouldn’t refinance just for the sake of refinancing, but there are times when it makes sense. For example:
- You currently have a high interest rate, and rates have dropped significantly. Refinancing when rates drop is a great way to lower your monthly cost and save thousands on interest over the life of your loan. Reducing your interest rate just 1% on a $200,000 loan can save you around $45,000 over 30 years. It can lower your monthly payment, especially if you are currently paying private mortgage insurance (PMI) because you didn’t have 20% to put down at the time you bought your home. If your home has increased in value or you have paid down some of the principal balance, you may be able to remove PMI from your payment to save even more each month.
- You have a variable interest rate that is set to expire soon and want to refinance into a fixed rate loan. Variable rates are fine right now as interest rates have remained low, but they can be unpredictable. Rather than hoping that the rates stay low forever, it’s better to get a fixed rate now and lock in that savings for the duration of your loan.
- You can’t afford your monthly payments. If your financial situation has changed since you first got approved, refinancing could provide you with a lower monthly payment that better reflects your economic reality.
2: How long will you be living in your home?
When you refinance you do have to pay closing costs on the new loan. If you don’t have cash you may be able to put those costs into your new loan, increasing the principal balance on your loan. To calculate the “break-even” point when the savings will be greater than the closing costs, divide the closing costs by your monthly savings.
For example, if you are refinancing and you will save $150 a month on your payment, but it’s $3,500 in closing costs:
- $3500 / $150 = 24 months
It will take you 24 months, or around 2 years, to get the full financial benefit from your refinance. If you are planning to sell your home in the next 5 years, that might not be worth the costs and hassle.
Learn More About Refinancing
In part two of this blog post we’ll cover two additional questions to consider before you decide if refinancing is the right choice for your loan. If you have questions about refinancing, reach out to the experts at Integrity First Lending to learn more.