As you likely already know, the average U.S. home mortgage interest rates are at record lows; below 4% since December for 30-year loans and currently below 3% for 15-year loans. If your current interest rate is at least one percent higher (some experts would even say half a percent higher) than what is being offered now, it may be worthwhile to refinance, depending on how long you plan to live in your home. Below are some of the factors that you should consider before taking the plunge, some of which are:
- Go online and search for a “mortgage refinance calculator,” of which they are many out there. At your current loan balance, calculate what your monthly savings would be with a lower interest rate (you may need to look at a statement to see what the total principal and interest portion of your current payment is). Are the monthly savings significant? Increase your loan value by $1,500 or $3,000, which are possible refinance cost amounts, and see what the monthly savings are.
- If the savings seem large enough, call your financial institution or another recommended one to see what rate they can offer you and what the actual closing costs to refinance would be. Sometimes these costs are zero if the financial institution is running a special. Ask the representative if they offer an “automated or drive-by appraisal,” or if you are a current customer, whether they can skip the credit check. Any closing costs are usually added to the balance of the loan and will eat into the monthly savings. The representative should assist you in determining your savings each month and over the life of the loan after factoring in the closing costs. Your loan balance being too high compared to the appraisal value could prevent you from being able to refinance. Also, if not a very big savings, keep in mind that reducing your interest rate will reduce the amount you can write off on your taxes, which may make not make refinancing as worthwhile.
- Your break-even point for number of months to cover the closing costs will generally be the total closing costs divided by your monthly savings. Refinancing would be worthwhile only if you plan on living in your home at least that many months. If you plan to stay in your home for a while, consider refinancing to a lower life loan, as you can usually get an even lower interest rate. This will provide substantial interest savings over the life of the loan, even if your monthly payments may not be much less. If you prefer keeping the life of your loan the same, most institutions should allow you to keep the end date of your current loan. Your monthly savings may not be as low, but this will provide more interest savings over the life of the loan.
Congratulations if refinancing provides you savings! There will potentially be an upfront cost for an appraisal, but signing your initials will likely be the most strenuous part of the process. Consider applying your monthly savings towards additional principal payments, which will save you even more in interest expense.
By: Brent Ringenberg, CPA