Is now a good time to refinance? What homeowners need to understand about current interest rates to determine if refinancing is worth it.
Interest rates have dropped, which is supposed to spur interest in buying a home and refinancing your mortgage. But I’m hearing from people who wonder if it is really worth their while to refinance their mortgage.
That’s understandable. It’ll take time to shop around for the right mortgage lender, gather up the paperwork and walk through the process. But if you can save $50 to $100+ per month, and keep a lid on costs, it’s probably worth it. Here’s how you might want to think through the issues associated with refinancing your mortgage:
Is Now a Good Time to Refinance? Why?
Interest rates have dropped to an extremely low level. In fact, we haven’t seen interest rates this low in the last couple of years. Homeowners who bought a house, condo, or a rental property in the last year or two, or who may not have had the best credit score when they bought six or seven years ago, might see substantial monthly savings if they refinance their property now.
And, it isn’t just conventional rates that have dropped. Homebuyers who are purchasing expensive homes worth more than $1 or $2 million are also able to secure extremely low-interest rates. One buyer just secured a $2 million mortgage for less than 3 percent.
So, it’s a good time to refinance whether you have a conventional, jumbo or super-jumbo loan.
What Should Homeowners Understand About the Current Interest Rates?
In a normal cycle, longer-term bonds carry a higher interest rate than shorter-term bonds, which makes sense if you remember that you’re taking more risk by locking up your money for a longer period of time.
The reason that interest rates are low is that the yield curve has inverted. That means, today there is a great degree of worry in the market about whether the U.S. economy is going to be in better shape five to 10 years from now, so bond traders are offering less for longer-term bonds. That’s why longer-term bonds are now carrying a lower interest rate than shorter-term bonds.
An inverted yield curve has accurately predicted a recession since the 1950s, and interest rates are reflecting that worry. The good news is home buyers and homeowners will benefit because mortgage rates, which are based on longer-term bonds, will be lower.
How Can People Decide Whether Refinancing Is the Best Move for Them, Especially Now?
The only way to find out is to shop around and run the numbers. You’ll want to talk to at least four or five different mortgage lenders and ask them the following questions: What interest rate can you get based on where your credit score and debt-to-income ratio are today? How much will that refinance cost? How quickly will you pay it off?
If you can pay off the cost of that mortgage refinance in two years or less, and you plan to own the property at least that long, most experts would tell you to go ahead and refinance.
What Are Some Tips for Understanding Whether or Not Refinancing Is Worth It for Them?
I have four rules for what I call a “home run” refinance: (1) Can you lower your interest rate? (2) Can you lower your monthly payment? (3) Can you shorten your loan term? (4) Can you pay off the refinance in two years or less? If you can answer yes to all four of these rules, then your refinance is a no-brainer. But, it may be worth doing even if you can only get two or three of them. It depends on your personal finances.
There’s one more thing to think through: If you have private mortgage insurance (PMI), and you live in a place where your home has gone up in value, can you refinance and eliminate your PMI payment? In some cases, especially with a very low initial down payment, PMI can be an additional 50 percent of the cost of the mortgage, or an extra several hundred dollars per month. If you can get rid of PMI (because you now have at least 20 percent equity in the property, due to property values increasing), you could save a significant amount of money each month with a refinance.
If You Want Your Mortgage Refinance To Pay Off, Do This One Thing
If you take the savings you’ll generate each month from your mortgage refinance and apply it to the principal balance that’s left on the loan, you’ll really see your loan start to decline quickly.
Here’s how it works: Let’s say you refinance and shorten your loan term from the 22 years that are remaining to a 15-year loan. In addition to cutting off 7 years of payments (already big savings!), let’s say you’re also going to save $50 per month. If you apply that $50 of savings to your mortgage principal balance, you might be able to shorten the 15-year term to 12 or 13 years – or even less.
Prepaying your mortgage is a good idea no matter what. I last refinanced my own house to a 15-year loan and started prepaying the savings each month. My mortgage will be paid off in about 8 years (at the end of 2020) or sooner. It really works.
If I’m Going To Refinance My Mortgage, What’s My First Step?
Pull a copy of your credit report and score. You can get it for free at My.Equifax.com or you can go to AnnualCreditReport.com and get a report for free and pay less than $10 for your credit score. (Your free Vantage score from My.Equifax.com will be a good indication of where you are, however.)
Then, call four or five different mortgage lenders and compare programs, interest rates, and closing costs. Feel free to negotiate with the lenders to get the cost of your refinance as low as possible. Then, once you know how much the refinance will cost and how much you’ll save, you can decide how to move forward.