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Average mortgage interest rates on 30-year and 15-year fixed-rate mortgages have risen a bit in comparison to the last several years. Depending on when you purchased your home and the rate you have on your current mortgage, the time might still be right to refinance into a new mortgage. You might not hit the historic low-interest rates of the last several years, but rates are still attractively low.
This leads to the big question of whether the time is right to refinance your mortgage.
The answer depends on several factors, including your financial health, your current mortgage interest rate, and how long you plan to stay in your home.
Your Finances
Before deciding to refinance, review your current financial health. Have you been paying your bills on time every month or have you been late or missed a payment? Do you have low credit card balances or a fair amount of credit card debt?
Your ability to qualify for lower mortgage interest rates that you see advertised online or in your local newspaper depends heavily on your three-digit credit score. That score may not be strong if you have a history of missed payments and high credit card balances.
Credit scores also impact the fee adjusters a borrower will pay. The higher the score, the more potential for lower fee adjusters and, in turn, lower closing costs. Keep in mind there are many factors that can play into the interest rates and fee adjusters you receive.
Your Current Interest Rate
Interest rates play a key role in whether refinancing your mortgage is financially beneficial. If you can significantly reduce the interest rate on your mortgage, you can save money each month by refinancing.
For instance, if you originally obtained a $200,000 mortgage at a 6 percent rate and made your $1,199.10 payment each month for 60 months, you would have an outstanding balance of $186,108.71. If you refinance that outstanding balance at an interest rate of 4 percent, your monthly mortgage payment will fall to $888.51 a month. That is a saving of $310.59 a month or $3,727.08 a year. That is significant.
Remember, refinancing your mortgage also costs money. According to estimates from the Federal Reserve Board, you can expect to pay from 3 to 6 percent of your outstanding loan balance in closing and settlement costs when you refinance. For a $200,000 mortgage balance, that comes out to $6,000 to $12,000. Factor in these costs to ensure you'll be saving enough money to pay back those fees over a reasonable period. The best thing to do to weigh the pros and cons of refinancing your mortgage is to speak to a professional mortgage lender.
Length of Stay
Finally, consider how long you plan on staying in your home before you decide to refinance. The goal of refinancing is to save money. You will not be able to do that if you plan on selling your home before you can realize the financial savings of a refinance.
For instance, if you saved $1,500 a year by refinancing with $5,000 in closing costs, you'll need to stay in your home for at least four years before you see the savings associated with refinancing.
