Three Good Reasons to Consider Refinancing Your Mortgage
Mortgage rates are on the rise and this raises an important question–when should you refinance a mortgage? The common reason to refinance a mortgage is that rates have gone down. This raises the question of just how much lower rates must be to justify the refinance. To answer this question, read on and look at three other good reasons to consider a mortgage refinance.
Interest Rates Have Gone Down
You should evaluate whether to refinance a mortgage based on today’s rates, not a prediction of future rates. Rates could have ticked up, predicting future interest rates is a fool’s errand. Most predict that rates will rise over the coming months and years, and this is an agreeable assessment.
Perhaps you have 20 years left on your mortgage and refinance back to a 30-year mortgage, the extended term will lower your monthly payment even at the same interest rate. How much you’ll save each month is a function of more than the interest rate. Many brokers tout the lower monthly payment but keep in mind that the lower payment is also a function of the term of the new loan. It’s important to factor in the tax consequences of a refinance. Lowering your interest rate saves money, but perhaps not as much as you may think once you adjust the lower interest payments for the smaller tax deduction
Many questions of just how much lower must rate be to refinance. There are numerous rules to follow and a better approach is to just do the math. It only takes these few steps:
- It would be best to determine how much in interest you’ll save each month (this number goes down as you pay down your mortgage, but as a rough estimate for a long-term mortgage the first month’s savings can be used
- Always good to try to reduce the interest savings by your marginal tax rate to adjust for the smaller tax deduction and this only applies if you itemize your tax deductions
- Use calculators to determine the total cost of refinancing your mortgage (your bank or mortgage broker can provide this information
- And do your math well and divide the total cost of the refinance by your monthly after-tax savings.
Your answer will be the number of months it will take you to reach the breakeven point. If you plan to stay in the home longer than that point, refinancing makes sense. Here it’s important to focus not just on the interest rate, but also on the cost of refinancing. Don’t worry if you didn’t follow all of that, because you are not alone. Let’s face it, the mortgage business is complicated. The key is to get firm cost estimates from a lender you can trust like before making a decision.
Check Your Credit Score Often, It Could Have Gone Up
Current mortgage rates can vary by as much as 1.50% based on your credit score. On a $300,000 mortgage, a 1.50% higher mortgage rate due to a mediocre credit score will add more than $250 a month to your mortgage payment. Even if rates haven’t gone down, you still may be able to qualify for a lower rate if your credit score has improved. To qualify for the best mortgage rates, aim for a FICO score of 760 or higher. If you don’t know your score, for help.
Is There the Need to Lower Your Monthly Payments?
By refinancing your mortgage to a term that is longer than what’s left on the mortgage, you can reduce your monthly payments. You have simply added back another ten years of payments to your mortgage at the same interest rate. It’s not advisable because you end up paying a lot more in interest due to the additional decade of payments. But it does lower your monthly payment which may be helpful in extreme circumstances.
Go From A Fixed Rate Mortgage To An ARM
Finally, refinancing can make sense as a way to convert an Adjustable Rate Mortgage (ARM) to a fixed rate mortgage. This is particularly true if you believe interest rates may be on the rise. What makes this decision so difficult is that there’s no way to know what interest rates will look like when the ARM’s rate adjusts. It’s certainly possible that rates could be lower several years from now than they are today. At any rate, it is better to be safe than sorry. Always a good idea to contact your lending agent at and they will be better able to help you make the right decisions.