February 26, 2020

To Refinance or to Not Refinance: 3 Factors to Consider

In our current low mortgage rate environment, it's hard to imagine a world without low rates. For those who have bought their home within the last 10-15 years like me, we can't remember truly high rates; in our time, mortgage rates have been mostly near historic lows. For those who lived through the 1980's as homeowners, they recall the highest mortgage rate on record: 18.63% for a prime, conventional loan. It's almost impossible to consider the difference in payment compared to today; use a mortgage calculator and use your current rate, and then try 18.63%. You'll see what I mean about the monumental difference.

In today's economy (early 2020), we do have factors that weigh against our economy such as the Coronavirus, which continues to drive mortgage rates lower. For many homeowners with current mortgages, this can mean significant savings on your loan. Today I review 3 factors to consider when refinancing your home, and if it may be worth it for you.

  • Rate Savings: The clear place to start when considering a refinance is the difference in the rate compared to your current mortgage. The larger the rate difference the larger the difference in monthly payment, especially for higher loan amounts. Providing that your credit and employment is equal or improved from when you bought your home and the property hasn't lost value, this is the first check in considering a refinance. As a general rule, saving a percentage point or more on your current rate is worth considering a refinance.
  • Look Past the Monthly Payment: Unless your rate is several percentage points higher than what you can refinance to, you may not notice a huge decrease in monthly payment when you compare the numbers. What is important to consider, however, is the decrease in the total interest paid by you over the course of the loan. You can find this number by calculating total interest on your current rate against the new rate you would qualify for, or ask a Loan Officer. The savings in interest typically adds up to the thousands or tens of thousands, depending on the size of your loan. This is typically with a lower payment and doing very little differently than what you're doing now. I personally like this mortgage calculator with interest amortization.
  • Consider a Lower Term: With low mortgage rates, it is often a good idea to consider a lower loan term. If you are currently in a 30 year mortgage, reducing it to 15 builds equity in your home at a quicker rate and significantly reduces the overall interest paid. It is possible you will pay a higher monthly payment compared to a longer term, but the difference can mean owning your home much sooner, or having greater equity when you sell.

Mortgages are complex, and knowing the best decision for you is important. When considering a refinance, I always suggest consulting with your real estate agent (if you have one) and a good Loan Officer to guide you toward the best decision for you and your family. Refinancing your loan isn't the right decision for everyone, but it may be the right decision for you.