Conventional wisdom says that it’s wise to refinance a mortgage after interest rates plunge. With the current rate sitting near record lows, borrowers everywhere are rushing to refinance. Here’s five factors you can share with borrowers to help them evaluate whether or not now is the right time and if they’re ready.
1. Your Rate
If your interest rate is more than 1 percent higher than current rates, you should lean toward refinancing. With current rates hovering around the record low of 3.5 percent, this rule of thumb probably applies to a large percentage of homeowners. Almost 40 percent of active home loans clock in at greater than 4.5 percent.
2. Mortgage Insurance
If you were unable to produce enough cash upfront to hand over a down payment of 20 percent, there’s a good chance you are paying a monthly insurance premium on your mortgage. If you have at least 20 percent equity, refinancing now can help you remove that insurance payment and save hundreds of dollars per month.
3. Thinking About Moving?
If you read the first two factors and immediately thought about financing, there’s a catch. If you’re not sure you’re going to stay in your home for the foreseeable future, refinancing may not make financial sense.
A refi is expensive. Costs may run as much as 3 to 6 percent of the loan total. To recoup those expenses, you need to pass a significant amount of time with the new, lower interest rate. You should probably expect to remain in your home for at least three years to reach the break-even point.
4. Mortgage Length
If you have the potential to drop from a 30-year mortgage down to a 15-year loan, refinancing may help you achieve a much lower interest rate. The monthly payment will go up, but you’ll still save yourself big money in the long run.
5. Cash-Out Refi
In a cash-out refinance, the homeowner pockets the difference after taking out a new mortgage that is greater than their current loan. If you have a good reason to need an influx of money — like paying for an improvement project that will bump your home’s resale value significantly, or paying off debt on a high-interest credit card — a refi could be a cash-out refi could be a wise financial decision.
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