The Fed’s action this week sent the average rate on a 30-year fixed mortgage sinking to 3.56%, the lowest level since 2016. Many of our clients have asked if now is a good time to refinance. A simple question on its face, but the answer can be complicated.
Here are four factors to consider before rushing to engage a mortgage broker:
- How much can you save? It’s worth digging out and reviewing the paperwork for your existing loan to confirm the exact rate you’re paying now and what your original closing costs were. Follow that up with a trip to an online mortgage calculator—you can try Bankrate, Zillow or use your bank’s website—to estimate the difference in your monthly payment and how much you could save by refinancing.
- What are the costs? As when you bought your home, there will be closing costs associated with a refinance. These range anywhere from 2% to 5% of the total principal of the loan and can vary by lender and region. Your current loan documents should provide a general sense of the costs you’ll face. By dividing your estimated monthly savings from a refinance into your total closing costs, you can determine approximately how many months you’ll need to stay in your current home to make the refinance pay off. If there’s a good chance you’ll be moving before the time is up—a career change, to downsize or you plan to retire elsewhere—then the juice likely isn’t worth the squeeze.
- What rate can you get? No one fills out loan applications for fun, but it’s essential to shop around to make sure you get the lowest rate you can on your refinance. Mortgage lenders are required by the Consumer Financial Protection Bureau to give you a “loan estimate” that compares offers from lenders. Make sure to review not only the interest rates but also costs—some lenders may offer a lowball rate, then tack on higher closing costs.
- Are you still paying PMI? Beyond simply lowering your rate, another factor is whether you’re paying private mortgage insurance (PMI). Lenders typically require you to pay PMI if you put less than 20% down on your home. Refinancing may allow you to cross that 20% threshold more quickly—getting rid of that pesky PMI and saving you money over and above the difference in your monthly payment.
If that seems complicated, here’s one quick rule of thumb: If the difference in interest rates isn’t at least 0.75%, then the refinance probably isn’t worth it. Please don’t hesitate to call your wealth management team with any questions about whether refinancing now is right for you. We’re here to help.