Is it the right time to refinance your mortgage?

Refinancing may be a great way to bring down your mortgage payment, take out a new loan for an important purchase, or pay off your mortgage sooner. COVID-19 has impacted interest rates, and refinancing mortgages is appealing to many right now. However, there are several factors to consider before you begin the process.

When the Federal Reserve dropped interest rates in response to COVID-19, homeowners began to contemplate whether or not it made sense to refinance their mortgage. There are many factors to consider. If you’re worried about meeting in-person to refinance your mortgage, know that many lenders provide the experience virtually. “You can work with your loan officer online, via the bank’s loan portal, email, phone, and even video call, so you get an in-person feeling but keep it virtual,” says Aaron Tyler, (NMLS #130688) Mortgage Loan Officer at U.S. Bank.
 

Why should you refinance?

Before you refinance, consider your goals for refinancing. Do you want to reduce the amount of interest you pay over the loan term? Are you consolidating debts at a lower interest rate? Do you want to reduce your monthly payment? Knowing your goals will help determine the best type of refinance for your situation and decide whether any closing costs are worth it.

When to do it

• These are some situations where a refinance might make sense for you:
• You’re in an adjustable-rate mortgage or interest-only loan and you want a more traditional mortgage.
• Interest rates are considerably lower than what they were when you took out your mortgage
• You’re going to be in the home long enough to recoup your closing costs
• You have calculated your potential refinanced mortgage “breakeven point” and it’s lower than your current mortgage’s breakeven point. Here’s how to calculate yours:
  
  Take your net closing costs and divide those by your monthly interest savings. Your net closing costs = your total closing costs minus any lender credits. Your monthly interest savings = current rate minus new rate divided by 12 x your loan amount. 

When to hold off

If any of the following situations apply, refinancing may not be the best choice at this time:

• You may be considering refinancing so you can fix up and sell your home. But refinancing usually involves closing costs. If you don’t stay in the home long enough to save more than you spent to refinance, it might not be worth it. However, before deciding against refinancing, check to see if you qualify for refinancing options without closing costs.
• If your existing mortgage has a substantial prepayment penalty, refinancing may be a disadvantage. Check the terms of your current loan before deciding to refinance.
• Refinancing frequently requires an appraisal. If your home isn’t in great shape, you may want to wait until you’ve made repairs. Learn what the Federal Housing Administration (FHA) looks for during an appraisal.

Choosing the right refinancing option

When reviewing refinancing options, consider whether you want a shorter term to pay off the loan more quickly or a longer term to lower your payment. Many mortgages come in 15-, 20- or 30-year terms. Also, consider the closing costs, interest rates and your ultimate goals for refinancing.

There’s also more than one type of refinance. You may want to do a cash-out refinance if you owe less than what the home is worth, or you may want to consolidate debt or borrow against your home equity.

 

Navigate your financial well-being throughout the COVID-19 situation here.