Consider Refinancing

Reasons You Should Consider Refinancing Your Mortgage Now

With mortgage rates hovering at historic lows, many homeowners are rushing to refinance. There’s much to be gained by switching your existing home loan for a new one, and here are three reasons why refinancing now could be a smart move.

1. You could reduce your monthly payment

The No. 1 goal when it comes to refinancing your mortgage should be to get your hands on a lower interest rate than your current one. And, of course, the larger the gap between the interest rate you have now and the new one, the more money you’ll save.

For example, if you have $150,000 remaining on your mortgage and you’re paying 4 percent interest, that means you have a monthly payment of about $716 (that’s principal and interest on your loan; it doesn’t include property taxes, HOA fees or other recurring expenses factored into your monthly housing payment). If you’re able to refinance at a 3 percent interest rate, you’ll reduce your monthly payment to $623—$1,000 in annual savings.

2. You could decrease the life of your loan and save on interest

You won’t always be able to lower your monthly mortgage payment by refinancing. For instance, if you refinance a 30-year mortgage into a 15-year loan, your payment likely will increase. It still could pay off to go that route, however, because you’ll shorten your repayment period. That not only will help you get rid of your housing debt quicker, but it also will save you money on interest.

Let’s say you have a 30-year, $150,000 mortgage at 4 percent interest, with a monthly payment of $716. That loan will cost about $108,000 in total interest. If you can refinance into a 15-year loan at 2.75 percent interest, your monthly payment will climb to about $1,018 because you’re giving yourself less time to pay off that loan. However, you’ll ultimately spend around $33,000 on interest rather than $108,000.

3. You can capitalize on a much-improved credit score

A key factor your mortgage lender will consider when deciding which interest rate you qualify for is your credit score. The higher the credit score, the more favorable home loan you likely will get. If your credit score was mediocre when you obtained your initial mortgage, but it has since improved markedly, you might be eligible for a much lower rate now.

And the lower your rate, the lower your associated costs. Of course, there are some situations where refinancing a mortgage doesn’t make sense. If you’re not able to lower your interest rate all that much, then it could pay to stick with your existing home loan.

There are closing costs associated with refinancing, so your goal should be to slash your interest rate by about 1 percentage point (or more, if possible). If you can’t pull do that, then refinancing may not be the best move.

Likewise, if you’re not planning to stay in your home for more than a year or two, you may not recoup the closing costs to refinance. So, keeping your old loan could be the better choice. Refinancing often is a move that works out well for homeowners, however, especially given today’s rates.

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