Compared to the last several years, average interest rates on 30-year and 15-year fixed-rate mortgages have risen slightly. But this isn’t all bad news for borrowers who are looking to refinance. Depending on when you purchased your home and your current interest rate, this could very well be the right time for you.
When you’re looking for the right time to refinance, there are three important factors to take into consideration. Take a moment to get to know and understand how each one applies to you so you can feel more confident in your decision.
1. Dig Into Your Finances
Before deciding to refinance, take an honest look at your current financial health. Have you been paying your bills on time every month or have you been late or missed several payments? Do you have tiny credit card balances or have you run up mountains of debt?
Your ability to qualify for low mortgage interest rates depends heavily on your three-digit credit score. And that score won’t be strong if you have a recent history dotted with missed car loan payments and soaring credit card balances.
To qualify for today's lowest rates, you'll need a credit score of 740 or higher on the commonly used FICO credit-scoring system. If your credit score is much lower than that, you might not qualify for an interest rate low enough to make refinancing worth your while.
2. Calculate How Much You’ll Save
Interest rates, of course, play a key role in whether you can justify refinancing your mortgage. If you can significantly reduce the interest rate on your mortgage, you can realize dramatic savings by refinancing.
Let’s say you originally obtained a $200,000 mortgage at a six percent rate and made your $1,199.10 payment each month for 60 months. You now have an outstanding balance of $186,108.71. If you refinance that outstanding balance at an interest rate of four percent, your monthly mortgage payment will fall to $888.51 a month. That’s a pretty significant saving of $310.59 a month or $3,727.08 a year.
However, let’s consider if your original $200,000 mortgage had an interest rate of five percent. 60 months later, you refinanced to lower it to 4.5 percent, saving you about $143.07 a month, or $1,716.84 a year. That might not be worth the time and money of refinancing.
Keep in mind that refinancing your mortgage costs a significant amount of money. According to estimates from the Federal Reserve Board, you can expect to pay from three to six percent of your outstanding loan balance in closing and settlement costs. For a $200,000 mortgage balance, that comes out to $6,000 to $12,000. Make sure that you'll be saving enough money to pay back those fees over a reasonable period.
3. Decide How Long You Plan To Stay
Finally, consider how long you plan on staying in your home. The goal of refinancing is to save money and you won’t be able to do that if you plan on selling your home before you can realize the financial savings of a refinance.
For instance, if refinancing saves you $1,500 a year and costs you $5,000 in closing costs, you'll need to stay in your home for at least four years before your savings pay back those costs.
Have other questions about refinancing? Talk to one of the experienced mortgage loan officers at Liberty Bank—we’re here to help guide you through the process.