Tony and Lisa, SF Natives.
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Should you refinance your mortgage?

There's a lot of talk these days about refinancing your mortgage. Interest rates are low, and it could seem like the right time. Here are some things to consider before you make that decision.

Should You Refinance Your Mortgage?

 

There's a lot of talk right now about refinancing mortgages. With mortgage refinance rates nearing record lows, it might seem like now is the right time to refinance. And in some cases, it could be.

But remember, refinancing your mortgage is a process that takes just as much time and effort as applying for one in the first place, so you shouldn't make the decision lightly.

Below are 3 things to consider before you take that step.

 


 

Interest rates

Reducing your monthly mortgage payments by securing a lower interest rate than your current loan is a good reason to refinance. Generally speaking, if your current rate is 1% higher than market rates, you should consider refinancing. Check today's mortgage rates.

And with interest rates so low due to the economic effects of COVID-19, it might seem like the perfect time. But make sure you factor in all financial costs that come with refinancing. Consider closing costs, application, appraisal, and title fees.

Then figure out your break-even point. This is the point in time when you will actually start to save money, the point in time after you've recovered the money you spent in refinance costs. Ideally, your break-even point will be within two years of your refinance date.

Also remember that when you refinance, you may extend the overall life of the mortgage. For example, if you are 10 years in and refinance for another 30 years, you'll be paying the mortgage for a total of 40 years. So, while you may have lowered your monthly payments, you may also pay more in interest.

 


 

The equity in your home

If the down payment you made when you purchased your home was less than 20%, your monthly mortgage payments include Private Mortgage Insurance (PMI).

However, if you've built up enough home equity to cover that 20%, you can eliminate PMI and reduce your monthly payments.

Increased home equity also means you have the option of considering a cash-out refinance. A cash-out refinance could be helpful to cover emergency repairs, medical costs, or other unexpected life events.

Be careful when considering a cash-out refinance, though. If the reason for the refinance is to pay off high-interest credit card or personal loans, or consolidate multiple debt sources, you may just be exchanging one type of debt for another.

 


 

Your credit score

One of the first things you should do before considering a refinance is to check your credit score.

Your FICO credit score weighs heavily in determining the interest rate you qualify for. If you've improved your score since you took out your mortgage, you may qualify for a lower interest rate.

If your score hasn't improved, think of ways to improve and manage it. Pay down debts like credit cards and other loans. Making payments on time also affects your score. Some credit reporting agencies will also factor in utility payments, such as gas, water, and electric bills. If you've been paying these on time, it could be an easy credit boost.

 

Still unsure?

If you're still not sure if refinancing your mortgage is right for you, check out our free financial education resources. You can also use the calculator below to help you make an informed decision. 

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