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Is it Finally Time to Refinance?

Updated: Apr 19

Deciding to refinance can be a tricky. There's a lot more to consider than simply evaluating current interest rates. Check out the last post below in our financial planning series to see if now is the time for you to consider refinancing.

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"Deciding whether to refinance is all about finding your break-even point—the exact future date when you’ll save more money on the new mortgage than the refinance cost."

During the past few months, mortgage interest rates have continued to flirt with historic lows and Federal Reserve experts don't see rates rising quickly over the next few months. Today, 30-year mortgage rates are hovering around the 3.25% mark, or even lower with some online banks. So that begs the question: If you haven’t refinanced your mortgage yet, why not? There are good reasons to hold off – i.e. if you are moving soon, have a small mortgage balance, or already have a rate of 4% or lower.

Deciding whether to refinance is all about finding your break-even point—the exact future date when you’ll save more money on the new mortgage than the refinance cost. This takes into account all the relevant variables, including tax ramifications, the fees you pay to refinance, and the difference from your current mortgage payments. If you’ll hit the break-even mark during the time you expect to be in your home, refinancing probably makes sense. For example, if your refinance cost is $5,000 and your net savings is $250 per month, it will take only 20 months to break even. Unless you’re planning a move before 20 months, a refinancing is worth your time. How do you determine the break-even point? Try this free calculator.

Lastly, here are 5 things you should know before refinancing:

  1. The Closing Costs. This may include fees for loan application and origination, home appraisal and inspection, deed recording, title insurance, and any “points” you pay to obtain a favorable rate. Some lenders charge other fees so keep an eye out and shop at least two lenders.

  2. Your creditworthiness. Amidst coronavirus uncertainty, lenders are being very picky. The best interest rates are only offered to high credit scores. Also, lenders have been confirming employment 3 different times during closing and sometimes on closing day. Be sure you’re a rock solid borrower on paper to save time and reduce underwriting headaches.

  3. Is your mortgage big enough to really save? With mortgages under $150,000, refinancing may be more hassle than savings.

  4. Is the house your primary residence? Rates differ between investment properties, second homes, and primary residences. So know that the advertised interest rate may not apply to your situation.

  5. Cash out refinances and debt consolidation. In case you were planning on combining a 2nd Mortgage, HELOC, or renovation expense into a new mortgage, know that higher rates apply for these types of “cash-out” mortgages. Beware as these mortgages can compound debt issues if mounting debt is becoming a problem.

While we are on the topic, we do not recommend consolidating depreciating asset debt (like car, boat or RV loans) with your refinance. If you already have these loans that usually cost over 5% interest, the sound financial decision is to target paying them off as soon as possible.

Now that your social calendar has been put on hold, consider spending an afternoon exploring your refinance options. It can save you a few hundred dollars each month!

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