Should You Take Advantage of Low Mortgage Interest Rates?
Finding the best time to refinance your mortgage isn’t always easy. Teryn Fitzgerald walks you through four primary factors that could help you make the decision.
In 2020, we have seen a steady decline of mortgage interest rates. According to Bankrate, the average 30-year fixed rate has dropped from 4.27% in May 2019 to 3.56% in March 2020. For homeowners, this can beg the question: should I take advantage of these low interest rates? The answer may vary depending on your goals. Here are some key things to consider when deciding if you should refinance your mortgage.
1) How long do you plan to stay in your home?
If you plan to sell your home in the next few years, then you may not get to see the benefits of refinancing. Typically, refinancing has closing costs associated with it. These costs can easily be a 3-6% of your loan amount. Therefore, it may take some time for the costs associated with the refinance to break even with your monthly savings.
2) How much equity do you have in the home?
Review how much your home is worth versus how much you owe. Most lenders will require you to have at least 5% equity in the home before you refinance. The amount of equity in your home may also be a factor on how much your closing costs will be and what rate you can refinance for.
3) What is your current interest rate compared to refinance rate?
If you can lower you rate by at least .75%-1%, you may want to consider refinancing. Also, the lower interest rate could free up monthly cash flow so you can save more into your retirement or pay down higher interest rate debt faster.
For example, a 30-year mortgage at 5.0% taken out 20 years ago with a 10-year term remaining and current balance of $180,000 might be refinanced today at approximately 3.0%. Maintaining the same period remaining on the mortgage, namely 10 years, would result in a monthly savings of close to $200. Over the remaining life of the mortgage, the refinancing would save over $24,000, not counting the interest earned on the monthly savings. If the savings were invested monthly and earned 7.0% annually, the savings from the refinance would be close to $35,000.
4) How is your current mortgage structured?
Review the terms of your current mortgage. If your mortgage is an adjustable-rate mortgage (ARM), your rate could go up in the future. You may want to consider locking in a fixed mortgage at a lower rate to avoid higher rates in the future.
It is a good time to think about mortgage refinancing. However, make sure you consider your own personal goals and current mortgage. Don’t be afraid to shop around to see what lenders are offering, but also compare the offers to how long it may take to recover costs. This opportunity has the potential to help you save big over the lifetime of your loan.