Should I Refinance My Mortgage?
With today’s rates being some of the lowest in years, it might be worth taking a look at refinancing your mortgage, especially if you’re still carrying a mortgage with a high-interest rate. There are many factors you should consider before refinancing, like how much you owe, your current interest rate, and your credit score. Refinancing your mortgage can save you hundreds of dollars per month, so it’s wise to explore your options to leave more money in your pocket.
What’s your current mortgage interest rate?
The first step in determining whether a mortgage refinance is worth it is to determine your current interest rate. If your current interest rate is above 6 or 7%, it might be time to start browsing. As of the time of this post, current mortgage rates are around 3-5%.
What is the amount of your mortgage?
Do you have $20,000 left on your mortgage? That might not be the best time to refinance. Do you have $250,000 left on your mortgage? This might be a better time to refinance. The higher the amount of your mortgage will make your interest costs higher. Therefore, the more you owe, the more you can save by refinancing your mortgage.
What is your credit score?
To lower your interest rate, you’ll need to have a solid credit score. Credit scores range from 300 to 850. If you don’t know your current credit score, you are entitled to one free credit report per bureau per year, by law. You can obtain your free credit reports here. If your score is 700 or above, chances are you will qualify for a better rate. It ultimately depends on what your initial credit score was and current market rates. For example, if your initial credit score was 850 and now it is 700, you COULD still benefit (because of market prices) but you could be even better off if your score remained 850. Having a good idea of your credit score if the next step in deterring whether it will be worth it to refinance.
How a mortgage refinance will impact your credit score
If you plan to refinance your mortgage, your credit score might take a small hit. You will add a hard inquiry to your report and lower the average age of your accounts. Because your mortgage is the most important use of your credit, this might not make a difference to you, but if you’re planning on using your credit elsewhere, you may want to take this into account.
What are current mortgage rates?
The market prices for mortgage rates are one of the largest factors of whether your interest rate will decline. Mortgage rates are ultimately determined by the bond market and mortgage-backed securities. You can read more about how mortgage rates are determined here.
Mortgage rates are determined by the previous information. The length of the loan, the amount of the loan, and your credit score all factor into the price of your mortgage. Below is the average price of a 30-year fixed-rate mortgage today.
Should I try to “time the market”?
One word. No. Trying to time the market is not a good idea and oftentimes can cost you more than if you had committed when rates were low.
Tips to know if you should refinance
After you’ve gathered all the information above, you’ll need to decide if it is worth it to refinance. We’ve outlined a few guidelines to help you make your decision.
Do you plan to own the home for more than 4 years?
How long you plan to own your home is a critical factor in determining whether it’s worth it to refinance. Because closing costs are typically around 2% of the loan, it will take at least a few years to recoup this money (if you plan to finance the closing costs). It usually takes 2-4 years to recoup this money, so if you plan to own the home for longer than 4 years, it might be wise to refinance.
How much longer do you have left on your current mortgage?
If you only have a few years left on your current mortgage, it’s not a good idea to refinance. However, if you still have 25 years, you could lower your total interest paid by refinancing. Typically, we’d recommend not refinancing if you have 10 years or less left on the home unless your interest rate changes drastically (6% or more). Because of the way mortgages are structured, you will end up paying more interest by refinancing when you have less than 10 years remaining on your current mortgage.
How much will you save in interest?
When you refinance, you might add to the length of your loan, which will lower your payment, but increase the final cost of your home. It’s important to take a look at all options, including a 15-year mortgage, which will help you pay down your mortgage faster. To determine how much you will save on interest, you should multiply the mortgage amount by your interest rate. This will give you your first year's interest amount. To compare, multiple your current mortgage amount by your current mortgage rate. Then subtract your old interest amount from your new interest amount. For example (assuming a standard mortgage amortization schedule), if you have a $300,000 30-year fixed-rate mortgage and your current interest rate is 6.5%, you would pay ~$19,500 of interest for your first year. If your new mortgage is 3.5%, you’d pay ~$10,500, which is almost half. Note that this is comparing two mortgages with the same 30-year term. Because refinancing typically happens a few years in, you’ll need to consider how your payments are structured to take into account how much you are paying towards the principal each month.
If you are less than 5 years into your mortgage, you plan to own the home for more than 5 years, and your interest rate is more than 1.5% lower, it’s usually a good idea to refinance. If you want to lower your total interest, see if you can opt for a 25 or 15-year mortgage instead of refinancing to a full 30-year mortgage. If you need some extra cash in your budget, refinancing towards a new 30-year mortgage might be your best option. There are many factors that come into play when considering a mortgage refinance so we recommend speaking with a financial advisor to see if it makes sense for you.
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