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This question as to whether you should refinance your home has been popular recently as mortgage rates are falling to new historic lows.  In the 1970s and 1980s, it was common to see interest rates in the double digits.  Fortunately, rates have consistently fallen and settled around 4.5% in 2019.  The ongoing coronavirus pandemic in 2020 has affected the housing market and interest rates have experienced another decrease to under 3.0% as of the date of this post.

Top Three Considerations

The first factor to consider in the refinance decision is how long you plan to be in your home.  The process to refinance includes closing costs that will either be paid out of pocket or added to the new loan principal.  You need to live in the home long enough to benefit beyond the break-even point where the interest savings is greater than the closing costs.

The next factor in the decision process is your new rate.  A popular rule of thumb says: if you can reduce the interest rate by at least a full percentage point, you should move forward with the refinance. For a 30-year note with a $400,000 balance, reducing your interest rate from 4% to 3% will reduce your monthly payment by about $220 per month.  Another option to consider when refinancing is to shorten the term to a 15- or 20-year mortgage. The shorter-term will typically have a lower interest rate than the 30-year mortgage. The shorter-term may cause your monthly payment to increase but will save you even more money in interest expenses.

Finally, review your credit score report to ensure that you will qualify for the lower rates.  If you have made any recent large purchases on credit such as a car, you want to allow time for your credit to bounce back from the dip created by the new debt.  Any inaccurate information on your credit report should be reported to the bureaus before applying to refinance.

After considering the three factors above, use a mortgage savings calculator to confirm that the refinance will help you meet your financial goal. The calculator allows you to enter your current mortgage information and projected new rate to analyze the potential savings.

Refinancing can be a smart financial decision if it lowers your monthly payment, reduces the term of your mortgage, or helps you build equity faster.

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