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The Simple Dollar

Mortgage Rates Have Dropped Sharply — Should You Refinance?

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by Mia TaylorUpdated on 06.18.19

 

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Home » Loans » Mortgage Rates Have Dropped Should You Refinance

Mortgage rates have dropped sharply over the past few months, giving millions of homeowners an opportunity to refinance into a more affordable loan.

The average rate on a 30-year fixed mortgage fell to 4.04% on June 12, according to Bankrate’s weekly survey of large lenders. Just four weeks earlier, the average rate was 4.25%, while it was 4.76% a year ago.

 

These decreases can make it tempting to refinance your mortgage. Some 6.8 million homeowners could benefit from making such a move, saving an average of $268 a month, according to real estate analytics firm Black Knight. But before you do, here are a few considerations and questions to keep in mind.

Do the Benefits Outweigh the Costs?

Determining the interest rate “trigger” point for a refinance transaction hinges largely on benefits over costs, says Peter Van Brady of SoCalVAHomes.org.

“If at current rates, the benefits of the lower interest rate and lower payments outweigh the costs, then the homeowner should pull the trigger,” Van Brady said.

The costs are all of the fees associated with refinancing a mortgage including closing costs, home appraisal, inspection and more. To help minimize this side of the equation, shop around for a lender who’s offering a no points and no fees loan, Van Brady said.

“This can reduce the cost to refinance to zero,” he said. “If at zero costs, the transaction results in a marginal benefit with a small reduction in interest rate, then pure economics would suggest that the homeowner move forward with refinancing.”

You’ll also want to keep the break-even point in mind when considering refinancing. This is the point when the monthly savings you’re realizing as a result of the mortgage refinance offsets the costs you paid to make such a move.

Just when you will arrive at this point depends on a variety of factors, including interest rate, closing costs and how long you intend to stay in your home.

There are plenty of easy-to-use refinance calculators available online to help you determine whether refinancing will result in a benefit, said Cristina Zorrilla, vice president of mortgage pricing at Navy Federal Credit Union.

 

If you’re not able to find a zero-cost refinance at a low enough interest rate, compare the savings associated with refinancing with the fees tied to refinancing a loan, keeping an eye on how long it will take you to recoup closing costs with the lower payment.

How Long Are You Planning to Stay in the Property?

Before refinancing, consider how long you plan to stay in the home. Though there is no hard and fast rule, generally if you’re not planning to stay for longer than three to four years, the cost of refinancing your mortgage likely won’t be worth it, said Matt Hackett, of Equity Now.

“There are costs associated with a refinance, so it’s important to calculate how long it will take to recoup the costs based on the interest savings of the new loan,” explained Hackett. “If it will take three years but the homeowner is moving in two, then it would not make sense financially to refinance.”

Christopher Linsell, real estate analyst for TheClose, said that refinancing a home loan can be a big opportunity for homeowners to save some money and take advantage of low rates, but that savings often hinges on how long you will be in the home.

“There’s almost no bad time to save money, but from a real estate perspective, before going ahead with the refinance, keep in mind your timeline if you plan to sell your home in the near future,” Linsell said. “If refinancing your mortgage will save you $100 per month in mortgage payments but there will be $2,000 in fees to the bank to restructure the loan, in order to make this worth it, you’ve got to own your home for at least another 20 months.”

 

A Few Drawbacks to Keep in Mind

Refinancing may reset the clock on your 30-year mortgage, so be sure you’re comfortable extending the life of your loan, or seek a new loan with a term equal to or even shorter than the term of your current loan.

“If someone is five years into a 30-year loan and they refinance to a new 30-year loan, the monthly savings may not accurately reflect the true cost of the mortgage over time,” Hackett said.

Keep in mind the longer the term of the loan, the more total interest you will pay if you stay in the house until the mortgage is paid off.

Timing can also impact whether you get the best possible deal.

One more thing: Some loans have a float-down feature that reduces the interest rate if rates fall between the time you apply and just before the closing, so be sure to ask about that and any costs involved.

 
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