Should you refinance now? Answer these questions first.

Should you refinance now? Answer these questions first.

Interest rates are once again at historic lows. Should you refinance your home? You’ve probably seen the headlines about low interest rates or heard friends talking about refinancing. Should you follow along? Is this another task you need to add to your already long to-do list? Will you be missing out on big financial benefits if you don’t? 

Answering this can be complicated, even without the issues COVID has introduced. The short story is refinancing can help some homeowners make significant savings on long-term interest costs. Answer these seven questions to find out if refinancing is right for you: 

  1. How long are you planning to stay in your current home? If you plan to move soon, your refinancing closing costs will probably outweigh the amount you will save on interest over a short period of time. If you’re in the gray zone, you’ll need to do some careful calculations. For example, one of my clients typically moves every three to five years. After running the numbers, we realized that if they refinanced into a 15-year term, they would save enough interest within five years to make refinancing worth it. And if they didn’t move again, they would have more equity built up for the next next home. 
  1. How many years are left on your mortgage? In general, the longer you have left on your mortgage, the more worth it is to refinance—you have that many more years to save on interest with a lower rate. If you only have a few years remaining, again, your savings probably won’t make up for your closing costs.
  1. What’s the difference between your current interest rate and your potential new rate? Take a look at your current rate and the rates mortgage lenders are offering. If you can save 1 percent, refinancing might be worth it, depending on your situation. If you’re in the 2 percent range, refinancing is much more likely to earn you significant interest savings. That said, I’m not talking to very many people who are able to drop 2 percent when refinancing because rates have been relatively low for so long. 
  1. Can you refinance to a shorter-term mortgage? I always advise clients, whether they are moving or refinancing, to never go into a loan with a greater term than your current one. If you are in a 30-year mortgage, don’t reset with a new 30-year term. Look for a 15- or 20-year term instead. There’s more flexibility here than you might think: If you have 23 years left on your mortgage, ask about a 20-year loan. Of course, shorter terms can mean higher monthly payments. Can your budget cover a higher monthly payment in the near future to save tens of thousands of dollars in the long run? Many of the refinances I help with result in slightly higher monthly payments in return for big savings in total interest costs. If your monthly budget is already stretched, refinancing might not be right for you right now. It all depends on your particular situation.  
  1. Are you saving enough to make the effort of refinancing worth it? Especially now, we need to be real about what we can take on. When you calculate your interest savings, don’t forget to weigh them against your time and energy costs in addition to your closing fees. Right now, refinancing is about a 75-day process, and there’s a substantial amount of work involved in collecting all the information the bank needs to process your loan—tax info, pay stubs, etc. (Remember what it took to get your existing mortgage?) If you would pay the same amount of money that you’re saving to not have to go through that rigamarole…then don’t do it!
  1. Will your lender re-sell your mortgage? This is a tip we give new mortgage applicants, too: Find out if the lender typically keeps the mortgage versus selling it to another servicing company. We prefer finding a lender who will service your loan themselves instead of selling it to another serving agent. There’s no real way to keep your lender from selling your loan—your terms won’t change, but who you make payments to and your quality of service might. 
  1. Will your lender give you the option to modify your loan in the future? We also look for lenders who will let you restructure your loan for a flat fee if interest rates drop even lower. Not all lenders offer this feature, but it’s worth seeking out. Restructuring is cheaper and simpler than refinancing, so having that option is a real plus. 

I hope these seven questions helped clarify the refinancing question for you. If you’re still unsure whether refinancing makes sense in your financial situation, we’re happy to help talk through the pros and cons. Make an appointment with one of our advisors, and we’ll help you get a clearer refinancing picture. 

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