U.S mortgage rates have reached historic lows. As of today, June 8, 2020, the average rate on a 30-year fixed-rate mortgage is 3.409%, while the average rate on a 15-year fixed-rate mortgage is 2.888%, according to personal finance site NerdWallet.
These record lows have many homeowners asking, “Is now the right time to refinance my mortgage?” Home loan experts lean largely toward “yes” — but only if owners meet certain criteria and ask themselves the right questions.
Stellar credit is essential to get that rock-bottom rate
“Those low advertised rates are going to be available only to borrowers with the very best credit scores, likely in the 750+ range,” says Jackie Boies, senior director of housing and bankruptcy services at Money Management International (MMI). “Take a look at your credit score and see where you stand before you begin applying for loans.”
If your income is hurting, it’s best to look at other options
“If you are one of the lucky ones whose income has not been negatively impacted by COVID-19, now may be the perfect time to refinance your mortgage,” says Boies. “If your income has been steady, you’ve been paying your accounts on time while keeping your debt low, and you’ve just banked your stimulus check or tax refund, this could be the time.”
If you’re unemployed or have taken other financial hits of late, this probably is not the time to refinance your mortgage.
“If your income has been reduced due to the current economic downturn, a refinance may not be possible,” says Boies. “In this scenario, homeowners should work with their mortgage company on forbearance or modification options that could make the home more affordable in the short-term.”
Set a specific goal for refinancing
“Just because current rates are lower than the note rate on your loan doesn’t mean it’s time to refinance,” says Chris Birk, director of education at Veterans United Home Loans. “The first step is figuring out what you want to accomplish with a refinance, whether that’s lowering your monthly mortgage payment, tapping into equity you’ve established, decreasing your loan term, or a combination of those aims.”
Compare the numbers
“For a long time, the general rule of thumb was refinancing often made sense if you could cut your rate by at least 1 percent; but saving even 50 basis points could mean big savings,” Birk says. “With rates at historic lows, any homeowner whose current interest rate is at or above 4 percent might stand to gain significantly.”
Consider the costs of refinancing
“You won’t really start saving money with a refinance until you pay for it,” says Birk. “Closing costs can vary based on a host of factors, but expect them to fall anywhere from 1 to 3 percent of the loan amount. To determine how long it’ll take to recoup the costs of a refinance, take your closing costs and divide them by your monthly savings.”
Birk continues: “For example, let’s say a refinance will save you $75 per month on your principal and interest payment, with closing costs at $2,000 — in this case, it would take you a little over two years (26 months) to recoup those costs.”
Consider the loan term
“Another consideration for homeowners is whether to shrink their loan term when refinancing,” says Birk. “Refinancing into a shorter-loan term can blunt or even negate the monthly savings of your refinance, but moving from a 30-year to a 20- or 15-year term could save you tens of thousands in interest payments over the life of the loan. The key here is being able to afford a higher mortgage payment in return for that considerable long-term savings.”
Refinancing probably isn’t worth it if you’re going to sell soon
Given the costs associated with refinancing and the need to recoup them, long-term planning is key. If you think you may sell your home soon, the process of refinancing is almost certainly not worth it.
“You won’t realize any of those savings if you’re planning to sell the home before your recoupment period ends,” Birk highlights. “The longer your recoupment period, the less impactful that refinance can become, especially if you aren’t planning to stay in the home for the long haul.”
Julie Colucci, associate advisor at New England Investment and Retirement Group suggests going by a five-year rule.
“[Ask yourself,] ‘How long do I expect to stay in my home?’” Colucci says. “If the answer is less than 5 years, you may not recoup enough monthly savings to cover the closing costs paid to refinance.”
Get quotes from multiple lenders
“Rate quotes can vary by lender, loan type and other factors,” Birk says. “Solicit quotes from multiple lenders to get a good handle on what kind of rates are within your reach. Then plug the numbers into a mortgage calculator for a look at what your new principal and interest payment could look like. That’ll give you a good sense of your monthly savings.”
Once you’ve collected quotes — but before moving ahead with any offers — check with your existing mortgage company “to see if there is an advantage to refinancing with them,” says Boies. “It’s possible you can get fees waived or leverage the other offers to make a deal with your current loan company. Like any other company, they don’t want to lose your business.”