With Interest Rates at a Three-Year Low, Is Now the Time to Refinance?

On the heels of the Fed cutting interest rates, mortgage interest rates dipped to a three-year low recently. In fact, the average rate as of August 2 on a 30-year fixed mortgage loan is 3.75 percent — the lowest the rate has been since November 2016.

Noting this, many homeowners might be tempted to explore refinancing their loan when the rates are at a low point. After all, even just a small 0.5 percent drop in rates could save homeowners thousands of dollars over the total span of the loan. Who doesn’t want to save money, especially on something that’s as expensive as a home?

But before you start drinking the low rate Kool-Aid, you first need to do your homework to see if this would truly benefit you. Here’s a look at some of the factors you should be weighing to determine whether or not refinancing is truly worth it for you:

Upfront Fees

Any time you refinance, you’re going to be on the hook for some upfront costs. Bank fees, appraisal fees and attorney fees are all costs that you’re likely to be on the hook for during a refinance, and these costs can add up anywhere to be 1 to 2 percent of the total cost of your mortgage balance. For a $200,000 mortgage, for instance, you might be looking at $4,000 in closing costs.

There are a few questions that you need to ask yourself to first determine if a refi is truly worth it:

  • What’s your current interest rate? Obviously, the higher it is, the more you have to gain by refinancing to a low rate of 3.75 percent. To piggyback on this, is your credit in good shape? If it’s not, you likely will not be approved for a low rate.
  • How much are you actually saving each month? Let’s say that you have 25 years left on a $200,000 mortgage balance, and refinancing could net you a 3.75 percent interest rate (down from 4.25 percent). Your original total remaining cost of mortgage is $325,043 over 25 years, which equates to monthly payments of $1,083. Refinancing to a 3.75 percent rate would drop monthly payments to $1,028, a savings of $55 per month.
  • How long will it take you to recoup the closing costs? Experts say you shouldn’t refinance unless you can recoup the upfront costs of doing so within five years. Over five years, the scenario above is expected to save $3,300 — some $700 less than the expected $4,000 it would cost to refi. Have your lender run a break-even analysis so you know exactly when you’ll start saving money after your upfront costs are accounted for. In this situation, it wouldn’t be worth refinancing if you’re going to stick to the “recoup within five years plan.”

How Long Do You Plan to Be in Your Home?

Usually, the longer you plan to spend in your home, the more worthwhile any refinance will be for you. Again, if you don’t plan to be in your current home longer than it would take you to recoup the costs associated with refinancing your mortgage loan, then it’s not going to be a worthwhile endeavor.

What’s Your Plan?

Before you pull the trigger on refinancing, it’s worth taking a moment to know why you want to do it. In other words, what are you going to do with the money that you’re saving from a lower interest rate each month? Is it going to save toward your children’s college education? Are you going to boost your retirement account? Do you just want a little bit more breathing room each month? Take a moment to analyze this, and come up with a plan that helps you live a better life. Ideally, you’ll be taking anything that you’re able to save and investing it somewhere else.

Noting all of this, are you in a good position to refinance your home in the wake of these low interest rates? Or wouldn’t it be in your best interest?

Regards,

Ethan Warrick
Editor
Wealth Authority

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