Interest rates are currently near all-time lows so many people are wondering if now is the right time to refinance. The Federal Reserve dropped interest rates by half a percentage point at the beginning of March 2020 and then again in mid-March and recently rates hit record lows. So is now the time to refinance?
Refinancing means getting a new loan on your home with new terms. There are many different options when it comes to refinancing so it’s important to take all of them into consideration when making a decision.
How to Evaluate If You Should Refinance
There are many reasons why one might choose to refinance. First, it is helpful to know how much money you will save (or not) by refinancing. Luckily, there are many helpful tools out there like this calculator that can help you see the big picture. It may be a good time to refinance if:
- Interest rates are lower than they were when you bought your home.
- You are paying PMI (Private Mortgage Insurance) and now have more than 20% equity, meaning you could eliminate the PMI payment.
- Your credit score has gone up since you bought your home, which may allow you now to get the lowest interest rate possible.
- You have the ability to switch from an adjustable-rate mortgage to a fixed rate.
- Retirement is on the horizon for you. Refinancing could be a great option so you can own your home outright by the time you retire. Having low debt is always the goal, so paying off your house could help give you peace of mind before you retire.
- You have enough money to put towards a higher monthly payment and switch to a shorter mortgage, for example going from a 30-year mortgage to a 15- or 20-year mortgage.
When NOT to Refinance
Refinancing is not always a good idea. If any of the below applies to you, now may not be the right time for you to refinance your home.
- Generally, the best rates will be available if you have 20% equity in your home. If you don’t have 20% equity, waiting to refinance may be advisable.
- Refinancing can be an expensive process. You have to factor in a refinance application, a new home appraisal, title insurance and escrow fees. Even with “no cost” refinances, these costs may be tacked onto your new balance. If you don’t plan to be in the home long enough for your monthly savings to be greater than the costs, then refinancing doesn’t make sense.
- While refinancing may seem like a good way to get some quick cash, be cautious of using your home as an ATM, pulling out cash to use for things like a new car. A cash-out refinance can erode the equity in your home, which may have longterm consequences should you find yourself needing to move.
Types of Loans You Can Obtain
Loans can be fixed-rate or adjustable rate. Fixed-rate is most common and generally what most people have in mind when they think of what a mortgage is. Fixed-rate is exactly what it sounds like: one consistent mortgage payment every month. With an adjustable rate mortgage, your payment can go up or down each month depending on what the index rate is. This may save you money for some months, but also makes it harder to plan out a predictable budget.
Mortgage loans can also vary by how long they are. 30-year and 15-year mortgages are the most common but mortgages can also be available for 10 or 20 years.
If you’d like to pay off your loan sooner but don’t want to be locked into the higher payments that come with shorter term loans, one option is to obtain a 30 year mortgage and then set a goal of paying it off early.
“Most 30 year loans can be paid off in 15 years simply by making the 15 year payment each month,” said Mary Shuck, Senior Loan Officer at Movement Mortgage. “Thus, a borrower can take the 30-year loan, pay if off like a 15-year loan but know they have the flexibility to make a smaller payment in seasons where their cash flow is lower.”
How to Evaluate Loan Types
With so many choices about the type of loan you can get, it can be overwhelming to pick which loan you want. The bottom line is that there is no right decision, only the right decision for you based on your finances and your future plans.
When it comes to COVID-19, Mary Shuck also said that, “it has taught all of us the need to be in the best financial position we can be in because no one can predict the future. It is important to not put off a refinance thinking you can just do it next month. If we can put ourselves in a better financial position then take care of it today.”
We know refinancing is a huge decision for any individual or family, so if you have any questions about refinancing based on your individual situation, we’d love to chat!