Low interest rates in 2017 have many home owners thinking it could be time to get a mortgage refinance. But financing experts advise that there are more things to consider than simply what the current rate is.
If you are thinking about refinancing, here are some good tips and signs to keep in mind that can help you to make this important decision on when to refinance your home:
#1 How Much Lower Is the Rate Than What You Have?
Some experts advise if the rate is 1% below what you have right now, it could be time to refinance. However, this is just a rule of thumb; there are other factors involved.
The size of your mortgage is a major issue as well. If you have a $1 million mortgage, then saving 1% on your rate is going to make a big difference. But if your mortgage is $200,000, things are less clear. Why?
Closing costs, experts say. Any time you refinance a mortgage, there will be new closing costs. These costs can be $2,000 or $10,000 depending upon the size of the loan and your state.
If you are saving 1% on your interest rate and have a $200,000 mortgage, after your closing costs, it could take several years to recoup the costs.
Is it worth it? It could be, if….
#2 You Plan to Stay in Your Home for Years
One of the biggest factors in deciding to refinance is how long you want to live in the home. Mortgage experts say that the average person stays in a home for seven years. If you are going to stay in your home for seven years and you can get a 1% lower rate, it may make sense to do the refi. You should be able to recoup your closing costs in that time.
However, things change if you decide to move in two years. For those folks, refinancing could end up being a financial loser.
Let’s look at a simple example: If your mortgage refinance closing costs are $4,000 and you are paying $100 less per month with the new mortgage, it takes three years and change to recoup your costs. But, if you are saving $250 per month, it would take only 18 months to pay it back.
The time you plan to spend in the home is a huge factor in your refinance decision. The issue is that people do not always know for certain how long they will stay in the home for sure. You might be 100% positive today that you will be in that house for the next decade. But next year, your husband gets transferred. Then you have lost money on your refinance.
#3 You Don’t Have a Lot of Equity
If you want to refinance, consider how much equity you have in the property and how old your mortgage is. Refinancing a mortgage is really starting over. If you refinance into a new 30-year refinance mortgage and you have been paying your old one for 10 years, everything you paid before is wiped out. So, you are refinancing into a new 30-year mortgage again. If you had stayed in the old loan, you would have had to pay only 20 more years, not 30.
If you have a lot of equity, you are paying longer than you would have, and have closing costs. You are going to be paying more interest on the 30-year loan up front than you were on the old loan too.
However, if your mortgage is fairly new and you have limited equity – such as a 3.5% down payment FHA loan – it often makes sense to refinance into a lower rate and pay less each month.
A good example of a situation where you may want to refinance is this: Say you just got an FHA home loan at the beginning of the year. After you have made six months of on time payments, you have the option of doing an FHA Streamline Refinance. This program allows home owners to refinance without an appraisal, credit or income check. This streamline refinance program often is a good choice if the interest rates are lower than they were when you took out the loan.
If you did not put down a lot of money when you bought the home, it makes even better sense to do the refinance.
#4 You Are in a Dicey Financial Circumstance
Your financial circumstances also matter in your refinance decision. A person who has lost a job or work hours could be having trouble making their payment. If so, saving $100 per month could be the difference between staying in the house and foreclosure.
Someone who is in a tight financial situation also could benefit from going from a fixed rate, 30-year loan into a 5 or 7-year adjustable rate loan. This product should carry a substantially lower rate and could really save you on your monthly payment.
#5 The Fed Is Raising Rates
The Fed has raised short term interest rates several times on the last year. This has had some effect on mortgage rates; they have increased from the start of 2016, but they are still quite low.
Generally, we are in a rising interest rate market, albeit slowly. The Fed also has promised to raise rates more in the future, so this could indicate it’s a smart move to refinance before rates get too high.