Stuart Becker | Regional Manager | Stanford Mortgage
If you’ve been following the news, you may have heard that mortgage rates have reached historic lows. This excellent news for home buyers, but it’s also good news if you already own a home. The reason? You may be able to refinance your existing mortgage. But is that the right move for you?
When you refinance any loan, a mortgage included, you swap an existing loan for a new one. The goal of refinancing is to snag a lower rate on your loan than you’re currently paying. Imagine you already have a 30-year fixed mortgage with a 4.25% interest rate on it. If you’re able to refinance to a new 30-year mortgage with a 3.0% interest rate, you’ll lower your monthly payments.
But not everyone refinances to get a lower monthly payments. If you swap a 30-year mortgage for a 15-year loan, your monthly payments will likely go up, even if your new loan rate is much lower. In this case, you’ll save a lot of money in interest over your loan’s life, and, you’ll get to pay it off sooner. We have many clients choosing a 15-year loan to get the lowest possible rate and pay-off their home quickly. As such, refinancing could make sense even if it doesn’t result in you paying less money month over month.
Whether or not it pays to refinance your mortgage today boils down to two factors:
- Do you qualify for the best mortgage rates out there?
- Will you stay in your home long enough to reap some savings?
The higher your credit score, the more likely you are to snag a competitive refinance rate. But if your credit isn’t great, then refinancing may not make sense. That’s because if the rate you qualify for is comparable to the rate you’re already paying, there’s not a lot of savings to be reaped when we factor in closing costs.
And that leads right into my next point. When you sign a mortgage, you incur closing costs – things like administrative fees, loan origination fees, Title Insurance fees. Closing costs also apply when you refinance.
Now, say you’re looking at $4,000 in closing costs, but refinancing also lowers your monthly mortgage payment by $350. In that case, you’d need to stay in your home for 12 months to break even. If you have no plans to move in the next five years, refinancing makes sense. But if you’re only planning to stay in your current home another year or two, then it clearly isn’t worth it – even though mortgage rates are low right now.
The same logic holds if you’re refinancing to a lower mortgage rate with a shorter term. Swapping a 30-year fixed mortgage for a 15-year loan might increase your monthly payment by $300, but save you $30,000 in interest over your loan’s life. If you don’t plan to stay in your home for very long, you won’t reap those interest-related savings.
Contact a Stanford Mortgage Advisor today and let us help find you and your loved ones the best mortgage option available.
(866) 912-3017 | www.stanfordloan.com.