According to Freddie Mac, the U.S. weekly average for a 30 year fixed mortgage is 3.6%, which is the lowest rate since November, 2016 and amongst the lowest rates ever! That means you should consider refinancing your old higher-rate mortgage. But how do you go about this?
Here are some factors to weigh:
Assess Your Situation
The first thing you need to do is to review your existing mortgage and write down the interest rate, current payment, loan balance and type of loan. That gives you a basis for comparison.
Interest Rate Difference
One of the main factors to consider when refinancing is the interest rate differential between your existing mortgage and what is available in the market place.
The rule of thumb is to consider a refinance if the new rate is at least 1% less than the current rate. Closing costs are sometimes as much as 2% of the loan. You need to ensure that the math works in your favor.
Adjustable Versus Fixed Rate
If you bought your house with an adjustable rate mortgage (ARM), then you also want to know the specifics of when the interest rate increases and by how much it can go up each year. Homeowners with ARMs need to make sure they can afford the future payment in the event of a rate increase.
With interest rates at historic lows, it makes sense for homeowners with adjustables to seriously consider locking in a fixed rate. An adjustable mortgage rate is typically cheaper than a fixed. Today, a 30-year fixed loan is 3.6% and a 5/1 ARM is 3.35%, according to Freddie Mac.
The 5/1 means the rate says the same for five years, and then shifts according to whatever benchmark the lender uses. Let’s say rates shoot up five percentage points. Wouldn’t you rather lock in at 3.6% than end up paying 8.7%?
How Long You’ll Live There
How long you plan to stay in your home, along with the interest rate, is probably the most important consideration. You need to know how many years it will take to recoup the cost of the refinance. For instance, it will not make sense to refi if you plan to move in three years and it takes four years to recoup the costs of refinancing.
Your home is likely your largest liability and largest asset, so reviewing the efficiency of this obligation could greatly impact the long-term success of your financial plan.
So, please reach out if you’d like to review your options with us to determine if now is a good time for you to refinance.
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