The ultimate goal of refinancing for some, if not all, homeowners is to get a lower rate and thus make mortgage repayment more affordable. Indeed, the prevailing low mortgage rates brought by the historic Brexit vote have spawned a mortgage refinance boomlet. And while the hype of Brexit has died down, mortgage rates continue to linger in the 3% level. Is now a good time to refinance?
Yes. Like that time you spent contemplating on getting a mortgage to buy that Colonial house on 3rd street, refinancing requires an evaluation of your present mortgage situation and future life prospects. It means considering the following things and scenarios.
Term: Short or Long
This question pops up when refinancing is discussed: “How long do you intend to stay in your house?” Whether you plan to live there for long or move out after a few years will help you decide if refinancing is worth going back to square one.
On that note, if you refinance to a shorter-term loan, you’ll repay the loan faster and make fewer interest payments. When you refinance or go back to a longer-term loan, say a 30-year fixed loan, you’ll make lower monthly payments as they get stretched over a longer period.
Rate: Fixed or Adjustable
It’s a given that you’re looking to refinance to a lower rate than your existing mortgage rate. A lower rate results in savings that would be substantial over time.
A rate-related consideration is whether you’d switch to a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). If you go from an ARM to an FRM, you’d enjoy the stability of having fixed monthly mortgage payments. Opting for an ARM is practical for people who (i) plan to sell their homes or (ii) seek a higher loan amount, e.g. jumbo loans.
ARMs usually have a reset notice that is given some three to six months before the actual rate adjustment. They also have a cap, may be periodic or lifetime, which limits the rate increase.
Costs: Costly or Cost-effective
Refinancing an existing mortgage entails a new set of fees and charges associated with closing. Generally, the costs related to (i) taking out a new mortgage in place of the old one and (ii) the new and current mortgage include:
- Points and origination charges
- Principal + interest monthly payments
- Mortgage insurance premiums
- Lost interest on costs incurred upfront and every month
And refinancing is made worthwhile if taking out a new loan costs less than sticking to your old mortgage.
Credit: Good or Bad
Good credit matters when refinancing a mortgage. Homeowners are often advised to defer refinancing until their credit improves. However, with rates dropping or rising as the markets will, a good refinancing opportunity might be lost.
For those with bad credit, these options may be available: FHA Streamline Refinance for FHA loans, VA’s IRRRL for VA loans, and USDA Streamline Refinance for USDA loans. Get a copy of your credit report and find out how your current credit score affects your refinancing chances.
Or better yet, ask our lenders directly. They can better explain how mortgage refinancing works in today’s low-rate environment.