Is it a good time to jump on the refinancing bandwagon?
The Federal Reserve has cut interest rates twice over the past few months and may be heading even lower. Does that automatically mean you should refinance your mortgage? Not so fast.
Sure, the trade war with China, slowing manufacturing and job growth are possible signals that the U.S. economy is slowing down.
Sluggish or negative economy activity often translates into diminished demand for credit — and triggers the Federal Reserve to lower rates.
It’s clear that mortgage rates have reflected the broader bond market. As reported by Bankrate.com, 30-year mortgage rates have dropped from an average 4.3% on May 1 to 3.97% on Sept. 20. If you’re refinancing, that’s largely been good news.
Yet you need to look at more than interest rates nationally. You have to ask some key questions to see if refinancing makes sense for you.
Ilyce Glink, author of “100 Question Every First-time Homebuyer Should Ask,” and publisher of the ThinkGlink.com blog, advises:
“You’ll want to talk to at least four or five different mortgage lenders and ask them the following questions:
- What interest rate can you get based on where your credit score and debt-to-income ratio are today?
- How much will that refinance cost?
- How quickly will I pay it off?
“If you can pay off the cost of that mortgage refinance in two years or less, and you plan to own the property at least that long, most experts would tell you to go ahead and refinance.”
Keep in mind that no refinancing is free. There are closing costs that will add up to thousands of dollars. You can always “roll into the mortgage” these expenses, but that means adding to your principal balance. Note: You can also pay for closing costs upfront.
What makes the most sense for you? Having a smaller mortgage payment is usually desirable, but will it make a difference in your overall financial situation? Will you be able to save the difference in payments or spend it?
Sometimes a lower rate or payment is a red herring, though. Shortening the term of the loan — from 30 to 15 years or less — produces big savings, even if the monthly payment is slightly higher.
Long-term savings add up through shorter terms because you’re paying less interest over time, often tens of thousands of dollars less. And you’re also mortgage free in a shorter period of time.
“Let’s say you refinance and shorten your loan term from the 22 years that are remaining to a 15-year loan, Glink suggests.
“In addition to cutting off 7 years of payments (already big savings!), let’s say you’re also going to save $50 per month. If you apply that $50 of savings to your mortgage principal balance, you might be able to shorten the 15-year term to 12 or 13 years – or even less.”
“Prepaying your mortgage is a good idea no matter what. I last refinanced my own house to a 15-year loan and started prepaying the savings each month. My mortgage will be paid off in about 8 years (at the end of 2020) or sooner. It really works.”