When interest rates are competitive, it could be a good time to refinance your mortgage. This is especially true if rates were a bit high when you first purchased your home.
But there are some caveats to think about before committing to a mortgage refinance, so plan carefully.
Maybe you bought your house when interest rates were higher, or your credit is much stronger today than it was back then. If you’re thinking about refinancing, odds are it’s for one of these reasons:
- You want to lower your interest rate. This is a common reason to refinance, and if the current rates are competitive, it could be a smart financial move.
- You want to lock in a fixed interest rate. If you started out with a variable rate mortgage, you could refinance your loan for a fixed rate instead that will remain steady for the life of the loan.
- You want to change the term of your loan, whether that’s to pay less or more each month, or pay less interest over time. For example, maybe you started with a 30-year mortgage but would prefer a 15-year now. Refinancing means you can change to a loan with a different term.
What Drawbacks are there in Refinancing?
It sounds straightforward, but there are a lot of nuances in refinancing.
Start with your credit. The stronger your credit, the more competitive interest rates you’ll be eligible for. So if you’ve missed some payments or your credit isn’t where you want it to be, work on building up your credit before you attempt to refinance.
Then there’s your home equity, or the portion of your loan you’ve already paid into. You’ll qualify for better refinancing rates if your equity is 20 percent or greater. So if you haven’t been in your house for long, it might be better to hold off and build more equity before refinancing.
You will also have to pay closing costs, just like you did when you first purchased your home. Look at what your total closing costs will be, and compare that to how much money you’ll save each month from your refinance. If it’s going to take a long time to recoup your closing cost fees from the refinance savings, it might not be worthwhile.
Should You Refinance Your Mortgage Now?
When it comes to refinancing, timing is key. Interest rates are low right now – a 30-year mortgage is averaging about 3.7%, which is historically low. If you bought during a recession and have been dealing with a higher than average rate, you could stand to save a lot of money over time by refinancing.
But rates move, markets change, and things can happen quickly. So keep a close eye on how rates are moving to get the best deal.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes financial resources and fee-only financial planning should be accessible. For more information on the services offered, contact Katie today.