Why This Might Be The Time To Refinance!
Yes, interest rates have fallen ... but don’t expect 0% loans. In and of itself, the Fed’s rate cut won’t cause mortgage rates to fall. Because mortgages are long-term loans, their interest rates tend to track long-term bond yields rather than short-term interest rates such as the federal funds rate.
Buying a new home or refinancing your existing home is both exciting and exhausting. Yet despite the historically low mortgage rates, rates were steadily increasing from September 2017 when the average rate was 3.78%, to November 2018 when rates peaked at an average of 4.94%. Ever since then, rates have decreased to an average of 3.99% (as of 5/30/19) a year ago. Today, we might see a 30-year loan at 3.375%.
So, how do you know if the time is right to refinance?
One general rule of thumb is that current mortgage rates need to be at least 50 basis points lower than a borrower’s current mortgage rate for a refinance to make sense (if current rates are at 3.5%, your rate needs to be 4% or higher). This is because of the loan-origination fees incurred during a refinance, which could outweigh any savings you’d see from a lower rate.
If that rule of thumb applies to you, then the next step is to ask yourself these questions:
- What is your goal in refinancing? Do you want to simply lower your monthly payment? That might be possible through signing up for another 30-year term mortgage, yet that also extends the loan term from your original mortgage, potentially negating any savings in total interest you would pay over time.
Ideally, your goal should be to pay less in interest through maintaining your current loan term (or close to it), or reducing the loan term, which would build equity faster.
- How long do you plan to live in your current home? If you plan to move to a new home soon, refinancing will, most-likely, not make sense due to the greater amount of interest paid at the beginning of the loan term.
Keep in mind, loans are always front-loaded with interest. That means you will continue to pay less in interest for each payment over time. You will want to plan to stay in your home for at least several years to benefit from a refinance.
- How much will you save by refinancing? You’ll want to determine how much in interest you’ve paid on your current loan, and how much you would pay with a refinance. Refinancing, like many other financial decisions, is a balancing act that requires tradeoffs. It’s important to both maintain an affordable monthly payment, while also reducing your overall borrowing costs. If you’re unsure of how to calculate the potential savings, let us know!
Still thinking a refinance makes sense for you? Here’s your action items to take:
1. Check your credit score and history. This can be done for free through annualcreditreport.com.
Knowing where your overall credit stands is important, as you’ll have better interest rate offers with a high score.
2. Start shopping. Ask your banker for a “good faith estimate” which will include all costs associated for the refinance. This can be used for leverage to find the best rate possible for you.
3. Have cash ready for closing. Don’t ever believe it when you see a “no-cost refinance”. There may not be cash required at closing, but those costs will still be built into your interest rate and loan repayments. While that may limit the amount to pay at closing, it also increases the mortgage balance for your home.
A final note of caution. Many people use refinancing as an opportunity to consolidate debt. If you have high interest rate personal loans or credit card debt, this could be a way to help consolidate and significantly decrease the amount you would pay in interest. While that can be a wise financial decision, it’s even more paramount that you wouldn’t use that as a license to go spend more and accumulate high interest debt. This consolidating strategy can only be successful through sound budgeting and discipline!
As always, there is not a “one size fits all” answer for refinancing. Every situation will be different, but hopefully these tips will help be a guide for success if refinancing is right for you!
Registered associates of Bluestone Wealth Partners are registered representatives of LPL Financial. Securities and investment advisory services offered through LPL Financial., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through LPL Financial affiliates and other fine companies. CRN-3082612-051220