Mortgage lending rates remain at near historical lows, in tandem with increasing real estate values across the country.
If you have a mortgage on a home you bought at least a year ago, take a moment to check in with current mortgage refinance rates: There may be opportunities to own your home for even less than your originally planned.
But just as a variety of factors determined what you ultimately paid when you bought your home, the same is true for a mortgage refinance, and whether it will really save you money.
Here are four easy ways to make sure a mortgage refinance makes financial sense.
1. How do refinance rates stack up to your current loan? You can check the current refinance rates on a free website like Bankrate—and even see analyst predictions for whether rates are expected to increase or decrease in the coming weeks.
Although the mortgage and refinance interest rates reflected on such sites are averages (the actual rate you’ll be extended if you’re approved depends on factors like loan amount, home value, your credit score, debt, income, and the lender), checking in with the current market rates will help determine whether a mortgage refinance is something to consider.
2. What do you want to accomplish with a refinance? The opportunity to secure a lower rate through refinancing isn’t guaranteed to save you money—even if the rate is lower than your current mortgage.
Answer one question to determine whether a refinance is something you can benefit from: “What do I want to get out of a refinance?”
There a many viable answers, including lowering your monthly payment, using your home equity for cash that you’ll use to pay off debt or finance home renovations, changing loan terms from an adjustable rate loan to one that is fixed, or moving from a 30 year loan to a 15 year term for a lower rate.
All of these goals can be solved from a refinance, but you have to know what you want to accomplish with a refinance to determine if it’s a good option for your needs.
3. How will I determine what I’ll spend—and save? Financial experts used to recommend that there be at least a two percent difference between a mortgage loan and a refinance loan rate to realize a financial benefit from it. In other words, if your current loan’s interest was 6%, the refinance rate wasn’t supposed to exceed 4%). The logic was based on the idea that it would take about two years to “break even” and cover the closing costs and fees associated with a refinance.
But the thinking has changed a bit, particularly as home values increase, and lending rates remain competitive. In truth, whether a refinance will save you money is dependent on your specific objective, borrowing options, and financial status. A large loan, for example, can be impacted greatly—even by a small change in rate. Similarly, a homeowner who needs cash immediately may benefit from a cash out refinance, regardless of how significant the rate change, if it’s an alternative to high interest loans.
Call at least three lenders to inquire about the refinance rates and loan terms for which you may qualify. Explain what you hope to accomplish from a refinance so the loan officer can recommend the optimal loan options.
Write down the important numbers that will impact the cost and potential value of the refinance based on your objective, including the quoted loan interest rate, loan terms, estimated closing costs and fees, and estimated monthly payment.
Conduct your own loan analysis (there are lots of free online mortgage calculators that do the heavy lifting) with the information you collect. Run the numbers and determine what each loan option you were quoted really delivers, relative to your goals.
4. What other borrowing options can I leverage? Today’s mortgage refinance rates are low-- but consider all of your borrowing options. If you’re considering a cash out refinance to fund home improvement costs, for example, traditional home improvement lending options may include lower fees and a simpler approval process than a refinance.
Likewise, if you’re otherwise debt free, have a significant chunk of money sitting in a savings account (that’s likely earning less than 1%) or you get an end of year bonus, you may be better leveraging the cash you already have on hand than borrowing at a higher interest rate.
The same is true if you simply want to lower the length of your loan term. You may benefit more financially by making a lump sum payment to your current mortgage principal, or adding some money to your monthly payment, rather than refinancing into a new loan.
On the other hand, if your goal is lower your monthly payment because you need the cash, a refinance can be a good option—but remember that lower monthly payments aren’t synonymous with saving money. If your refinance extends the terms of your loan in order to lower those monthly payments, it may cost you more than you intend in the long-term.