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5/6/2020 | Team United
If you're a homeowner and see falling interest rates, sirens are probably going off in your head. You might be thinking now is the time to refinance. And that is possible. You may be able to save money by refinancing your existing mortgage. However, the best time to refinance is not the same for everyone.
The short, but inconvenient answer is that it depends. It depends on your finances and current mortgage terms. It depends on national interest rates and the Federal Reserve's monetary policies. It depends on your financial goals, needs, and projections. Simply put, it depends on a lot. Here are some questions to see if the time is right to refinance.
If you can lower the interest rates on your mortgage, you should strongly consider refinancing. It is far and away the most common reason for refinancing due to the money-saving potential. Specifically, homeowners will pay less interest over the life of the loan.
Consider this. You have a 30-year fixed-rate loan of $300,000 with a 4.5 percent interest rate. You can expect to pay $246,783 in interest over the life of the loan. However, if you refinance, you can cut that figure dramatically. The same loan at a 3.0 percent interest rate would only pay $155,089 in interest. Even when you factor in what you have already paid, you will come out ahead.
While lower interests are the most popular reason to refinance, they aren't the only ones. Shortening the repayment period is a smart move that can pay dividends for your wallet.
Today, most homeowners hold a 30-year fixed-rate mortgage. They have relatively low monthly payments, payment flexibility, and stability against interest rate fluctuations. While the 30-year fixed-rate mortgage has marked benefits, it is also the most expensive option.
Changing to a 10, 15, or 20-year fixed-rate mortgage can significantly speed up the repayment process. For instance, moving from a 30-year to 15-year mortgage reduces expenses by 65 percent. This move makes sense if you are in a stronger financial position than when you first negotiated your mortgage. That way, you can start paying off the principal sooner, instead of dedicating monthly checks to interest rates.
Adjustable-rate mortgages or ARMs have interest rates that change over time. That is less than ideal if you like predictability and plan to live in your home for the long term.
Fixed-rate mortgages are more straightforward. Their interest rate is the same on the first payment as it is on the last one. Put another way: your monthly principal payment will never change. Many homeowners opt to switch to a fixed-rate mortgage to simplify their budgeting and avoid interest rate increases.
Plug in your current interest rate and monthly payments. Then, insert the details for your new loan. Submit the information, and voila, you can instantly compare your existing and ideal mortgage. You can also use a human refinancing calculator when you visit United Federal Credit Union in person.
Refinancing isn't always free. Depending on where you go, you can expect a couple of added expenses, such as a $300 to $600 appraisal fee for estimating the market value of your home. Other flavors of fees include mortgage application and origination.
At United Federal Credit Union, we think fees are overrated. That's why we don't have them. Instead, you can secure your mortgage with zero closing cost options and a discounted rate when you use autopay from a United account.
At a certain point, refinancing will pay for itself. That is the break-even point. To find your break-even point, divide the mortgage closing costs by the monthly savings from the new terms. For instance, if you pay $3,000 in closing costs and save $150 per month through refinancing, you will break even after 20 months.
Higher credit scores mean lower interest rates. Someone with a 30-year fixed-rate mortgage and FICO score of 760 can expect an APR of 3.071 percent. If they had a 660 FICO score, however, their interest rate would be 3.684 percent. As a result, the person with the higher rating will save $36,651 over the life of a $300,000 mortgage. In case you're wondering about your possible interest rate, there is a loan savings calculator for that.
Refinancing will also lower your credit score, so make sure your credit is rock solid beforehand. Lenders will perform hard inquiries to see your financial history. It results in a temporary drop that becomes larger the more lenders you contact. While the dip is not ideal, it is necessary to secure the best interest rates possible for your refinanced mortgage.
Refinancing can be a savvy decision if it shortens your loan durations, reduces your payments, or helps you build equity faster. Before you refinance, though, you should look at your financial situation and ask plenty of questions, like: How long do I plan to live here? How much money will refinancing save me?
Remember, mortgage refinancing is not one-size-fits-all. Just because interest rates are low or your uncle Chad said so, doesn't mean it's the best time to refinance your existing mortgage. Consider that refinancing costs about two to five percent of the loan's principal. Therefore, it makes more sense if you plan to stay in the house long enough to recoup those costs. Otherwise, this seemingly savvy decision may not save you money on mortgage payments or increase your equity.