Mortgage interest rates are at historic lows right now. And you may be thinking, “Should I refinance my home mortgage?” In today’s episode we’ll walk through the decision making steps to help you decide, is refinancing a good decision now? Ask am I going to stay in my home for at least a few years? The average closing costs for a mortgage refinance are about $5,000. So if you're only going to be in your home for a few years, you may not save enough with a lower interest rate to make up for those closing costs. Are you nearing a milestone event, like retirement or a balloon payment on your existing mortgage? If yes, then consider refinancing before your options become more limited.
Next, are you trying to borrow more than 80% of the value of your home? If you are, you likely need to have private mortgage insurance. And this is an extra fee that you'll have to pay every month in addition to your normal mortgage payments.
Then ask, has my credit score recently improved? If yes, this is probably another good time check out refinancing, you may be eligible for a lower interest rate. Is your current mortgage a fixed interest rate? If yes, again, it's a good time look at refinancing for a better rate. Do you have an adjustable interest rate now and do you expect interest rates to rise in the future? There is a good chance interest rates will go up from these historic lows, so again, this is a good time to consider a refinance at a low fixed rate.
The the key question is, can you qualify for a new loan rate that is meaningfully lower than the rate you're paying now, or at least removes the need to have private mortgage insurance. Talk to a mortgage broker or your current lender and see what they can offer and what would be the closing costs. What's your breakeven point? How long would it take you to pay back those upfront fees?
Are you a veteran, live in a rural area, have lower credit or lower income? You may qualify for a VA, USDA or FHA loan. They come with some additional fees, but they don't require PMI. And you may still qualify if you're having trouble qualifying for a conventional loan. These government loans can offer lower down payments, favorable rates, and relaxed guidelines.
The next ask has the value of your home gone up significantly since you first bought it? If yes, you can contact your current lender to remove private mortgage insurance. Is your primary goal to reduce your monthly mortgage payments? If yes, consider a 30-year fixed rate mortgage, this will decrease your mortgage payments. And then you can apply that excess cash to your other savings goals or financial needs. Is your primary goal is to reduce your interest you pay over the life of the loan? Consider a shorter term loan like a 15-year fixed, you'll get lower rates usually than you would on a 30 year mortgage and pay interest for fewer years. So you'll save a significant amount of money by refinancing a 30-year loan to a 15-year loan.
He’s a link to a flowchart of today’s discussion:
Should I Refinance My Mortgage.pdf
If you have any questions, please reach out to me at katie@moneypilotadvisor.com
