The pandemic has taken a toll on the economy (and American families). While the news has been largely negative, there is one possible silver lining – mortgage rates are hitting historic lows. For some homeowners eager to reduce their debt load, that might mean it’s time to refinance. Is that the case for you?
While many homeowners will benefit from refinancing when rates are low, that rule doesn’t apply across the board. It might seem like the proverbial no-brainer, but the truth is a bit more complicated. In this post, we’ll explore how to tell if you should refinance while rates are low or if you should bide your time a little longer.
Step 1: Consider Your Goals
The first step with refinancing is to consider your goals. What are you trying to achieve with the refinance? Are you trying to consolidate debt? Are you looking for a lower monthly payment? Once you know your goals your Mortgage Advisor will help make sure you get a good deal and you are achieving your goals.
Step 2: Make Sure You Qualify
When you refinance your mortgage, you will still have to go through to make sure you qualify. The lender will have to check your credit score, work history, income, equity ratio in property among other things to determine your eligibility. Have your information such as your credit score, and income ready and ask the lender if they can give you an idea on what you would qualify for. Some lenders can tell you where you stand without needing to pull your credit.
Step 3: Determine How Much You’ll Save
The point of refinancing is it is going to benefit you in some way. Make sure you know how much refinancing your mortgage will save you and that it justifies the cost. If for instance, your goal is a lower monthly mortgage payment you should check your current rate against the current market mortgage rates (and the rate you would qualify for). Is it actually much higher? Will refinancing into a rate that is half a percentage point lower save enough money for the refinance to make sense? What is the break-even point (the point at which the savings equals the cost of the mortgage)? Is it 2 years or 20 years? Having an experienced Mortgage Advisor will help you figure out these key decision indicators.
Step 4: Figure Out Your Closing Costs
All financing comes with closing costs of some type. With taxes, the average amount Americans pay in closing costs is over $5,700. Once you know how much your closing costs are it will help you identify your breakeven point. If for instance, your closing costs are $5,700 and you are saving $250/mth in the interest then your break-even is $5700/$250=22.8 mths a little under two years. That may be a good deal for you because if you have a 30-year fixed mortgage you get to enjoy 28 more years or 336 payments of a reduced mortgage payment.
Step 5: Make A Plan
The final step is to make your plan and execute it. If you have been working with a mortgage professional and you have done steps one through four make sure you should be in good shape. Once you have the terms with the mortgage professional it’s not a bad idea to get a second opinion. If you’re working with a bank call your local Mortgage Broker and see if they can offer you better terms.
Making Your Decision
Is now the right time to refinance your mortgage? There is no one-size-fits-all answer here. While a mortgage calculator can be more than helpful in figuring out the numbers, there are other things that you’ll need to consider. Working with a reputable mortgage broker is important – with professional advice and guidance, you can determine whether you’re best served by staying with the rate you have now, or trying to refinance your mortgage at a lower rate.
Get in touch with us at Best Rate today and discuss your refinancing needs today.
Best Rate is a Michigan-based Mortgage Company currently licensed in Michigan.