Interest rates are still at extremely low levels, and while that’s bad for savers, individuals looking to borrow money are finding that the costs of doing so continue to be relatively affordable. Loans for new cars and other types of consumer products have certainly become more affordable due to these low interest rate conditions. But there’s perhaps nothing that has received a greater benefit than the home mortgage market.
Low rates on new and refinance home loans continue to be extremely attractive. But the choice of whether or not to refinance your existing mortgage is not necessarily an easy one.
Here are some factors to consider when making the choice between refinancing or not:
What is the Rate of Your Current Loan? The starting point for any refinance analysis is the prevailing rate of your current mortgage. The closer your current rate is to the rate for a new mortgage, the less you stand to gain by refinancing.
What are the Terms of Your Current Loan? But it’s not enough to look only at your current interest rate. It’s also important to consider how long that rate will be in effect for. For instance, if you have an adjustable rate mortgage that’s set to reset soon, then you want to take a look at what your new rate will be.
Furthermore, it’s important to understand how often your loan rate resets. One common mortgage product is for a fixed rate for a certain number of years (usually five or seven), then for the rate to reset to a market rate every year thereafter for the remaining term of the loan. If you believe that rates will stay low, and you have such a variable rate mortgage, you may prefer to let the rate reset under your current loan rather than incur the cost of refinancing.
How Long Do You Plan to Stay in Your Home? Obviously you can’t predict the future, but if you know you’re likely to want to sell your current home within the next three to five years, then refinancing may not make financial sense. If you’re fairly certain that you’ll be staying, then refinancing could save you a significant amount of money.
How Much Will Refinancing Cost? There are closing costs with any home mortgage, including a refinancing. Ask your local lenders for estimates of these costs, and analyze whether the amounts you’ll saving in a lower interest rate are offset by the fees you need to pay in order to refinance.
How Much Time is Left on Your Current Mortgage? All other factors being equal, the longer you have remaining on your current mortgage, the more you stand to gain by refinancing.
Finally, you need to make your own estimate of where you think interest rates are headed. If you believe that the current low interest rate environment will not last long, then there may be more of an incentive to refinance soon.
Tags: borrowing advice, mortgage advice, refinance mortgage