“When Should I Re-Finance My Mortgage?”

Everybody loves to save money, and since we are in a period of unprecedentedly low interest rates, the shiny object of refinancing can be an attractive proposition.  But how do you know whether refinancing makes sense for your situation?  What if interest rates drop even further in the future and you picked the “wrong” time to refinance?  What about the refinancing and closing costs that my bank will charge me to refinance?  Ultimately, the decision should come down to how quickly you would break even and whether that timeframe makes sense for your personal situation. How Much Would I Save on my Monthly Payment? Current average interest rates on 30-year fixed rate mortgages are right around 3.9%.  So, let’s walk through an example of someone who currently has a $250,000 mortgage and is paying a 4.5% interest rate.  Their current monthly mortgage payment is $1,700 per month and has 20 years remaining on the mortgage.  If they were to refinance the full mortgage amount for 20 years and achieve a 3.9% interest rate their monthly payment would drop to roughly $1,500 per month.  This is a $200 per month savings!  However, keep in mind that the bank will likely charge between 2% to 4% of the mortgage value in closing costs which is anywhere from $5,000 to $10,000.  If we assume a middle ground of $7,500 of cost to refinance, then it would take this individual 37.5 months to break-even on the decision. How Long Do you Plan on Staying in Your Home? Once you’ve been able to sit down with a lender and gather these important details, the question then becomes how long you plan on staying in the home.  Continuing with our current example, if this individual plans on moving and selling their current house sometime in the next 3 years then it probably doesn’t make sense to refinance.  However, if they see their current house as their home for the next 10 years, then the decision makes a lot of sense.  While we can never be 100% sure how long we will live in a city let alone a house, having the break-even information at least allows you to make an informed decision of how long you would need to stay there for a refinancing to make sense. What Does My Credit Score Look Like? Knowing your current credit score and how it compares to your score when you first secured your mortgage can make a big difference.  IF you have had a lot of adverse credit events since securing your original mortgage, then a lender is likely to penalize you with a higher rate of interest which increases the advertised rates.  Conversely, if you have managed to clean up your credit since buying your home, then a refinance can look even more attractive.  Sites like creditkarma.com are a great free resource for you to check your credit score and also clean up any inaccurate information that you find. Refinancing your mortgage isn’t always as simple as comparing your current interest rate with currently advertised rates.  It’s important you take into account the costs of refinancing and ultimately the length of time you plan on being in your home before making a final decision.  If you, or someone you know, has questions about refinancing then reach out to one of our advisors today!

December 6th, 2019