Rates are Low.. Is Now a Good Time to Refinance Your Mortgage?

Something has been on my mind lately - interest rates.

Once upon a time I worked in mortgage lending and every now and then I’m asked by a friend or acquaintance what I think about the current rate environment and if now is a good time to refinance.

It sure seems like it might be. But a lower interest rate isn’t the sole reason to refinance. And even if the rate is lower it may still not make much sense.

But we’re being bombarded with the lower rates message. Every time I open the Apple News app I seem to be told mortgage rates are lower than they’ve ever been.

Mortgage interest rates have fallen to historic lows. Rates for a 30 year fixed rate loan are at 2.67% while a 15 year fixed rate is 2.21%. 

A 30 year loan is under 3%! That’s just crazy to me. I’m not ancient or anything but my first mortgage was 5.125%. And I thought that was a great rate.

With my current rate being a little over 4% I decided to start looking into refinancing in October. A few weeks ago I closed on my brand spanking new mortgage (ugh). 

Admittedly, my motivation was not solely based on the rate environment. I’m in the midst on a large (seemingly never ending) renovation and wanted to take advantage of the low rates and a little equity.

Since rates seem to be plummeting, the pandemic is raging on and economic uncertainty seems to be very likely in the near future, it made me stop and think - when should someone really refinance their home to take advantage of a better interest rate?

First, let’s take a look at the reasons you might want to refinance:

1) To lower your monthly payment - refinancing with a lower interest rate or longer term can reduce your monthly payment and make in more manageable.

Contact a lender to see what your options are. I shopped around for the best rate and was surprised to see not only the differences in rates but also the differences in closing costs.

2) To pay less interest over the life of the loan - refinancing with a lower interest rate can save you money by reducing the total amount of money you’ll pay in interest over time.

3) To shorten your loan term - if you’ve been paying your mortgage for a while or if rates fall low enough, refinancing your 30 year loan down to a shorter term may keep the payment manageable while also taking years off the life of your loan.

Just to drive this point home - a $100,000 30 year mortgage at 3% leaves you with a principal and interest payment of $421.60. If you shorten the term to 15 years (I left the rate at 3% for simplicity but presumably your rate would be lower for a shorter term), your P&I payment $690.58.

So yes, your payment will be about $270 higher but you’ll pay your loan off 15 years earlier. That would be the difference between 61 and 46 to me. 46 sure would be a nice age to be mortgage free by!

4) To tap into equity - if your house has appreciated in value or you’ve been paying down your mortgage for some time, refinancing could give you access to some cash.

Maybe you’re like me and thought a giant renovation while the economy teeters and unemployment is scary high is a good time to spruce up your home? Before you think I’m terribly irresponsible and stop reading, I decided to do said sprucing in 2018! (Yep, I definitely added that last bit to convince myself I’m not totally irresponsible. Sometimes a girl needs a little pep talk.)

Now, let’s take a look at when at when it might be a good idea to refinance:

1) You can save lower your interest rate by 1%. Here’s a good old rule of thumb. I don’t know who determined the 1% benchmark but when I mentioned to my dad I was thinking about refinancing he asked me right away if the rate was at least 1% better. 

I didn’t know this was a hard and fast rule until I did some more research on the topic and kept seeing 1% pop up. 

2) You’re planning on staying long term. It makes no sense to refinance if you’re planning on putting a for sale sign in the front yard tomorrow. 

You’ll want to make sure you plan to stay in the house long enough that your savings on your payment is sufficient to recoup the cost of refinancing.

3) You’re ready to ditch the adjustable rate. Ok, I’ve worked in lending and I understand why folks get adjustable rate mortgages but I’m a risk adverse chicken. Refinancing to a fixed rate mortgage when rates are low takes away the uncertainty of rate resets.

4) You’ve cleaned up your credit. Listen I get it, ish happens and you fall behind or you simply forget to make a payment or two, then your credit score takes a hit. It happens to the best of us. But things have been going well and your score has been creeping up. Now might be the time to refinance and take advantage of a better rate.

5) You can eliminate PMI. If you’re currently paying private mortgage insurance but you believe your home has appreciated in value you may be able to refinance and kiss PMI goodbye.

Unfortunately, if you’ve only been in your home for a short time this may not be an option. Many loans have a seasoning requirement that makes you wait two years before you can refinance to get rid of PMI.

I’m certainly not an expert and I recommend you talk to someone who is if you’re thinking about refinancing. But I hope that this list helps you decide if refinancing may be a good option for you.

I understand the idea of refinancing can be a bit daunting but remember to weigh the pros and cons. 

Does it really make economic sense? Will the money you save make up for the money you need to lay out for closing costs? How long until you’ll actually realize the savings?

In the end I was able to lower my interest rate and monthly payment while also taking some cash out for my renovations. Which significantly lowered my stress levels. 

Why did no one warn me that renovations can be so dang stressful?! Did they and I just didn’t listen? I’m not sure, but I’m counting down the days until I’m done.

Whether or not you decide refinancing is right for you, I wish you the best of luck.