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Is It a Good Time to Refinance?

Posted in: Home Ownership | August 9, 2020

In case you missed it, interest rates are at a 30-year low! With sufficient credit and financials, a 30-year fixed rate mortgage is available for under 3%. If you’re debating whether it’s a good time to refinance, here are a few things that might help you decide.

Monthly Savings

Refinancing your mortgage for a lower interest rate can save you money each month. How much you save depends on your current interest rate and the new interest rate. Additionally, you should consider closing costs. Even if those charges are rolled into the loan, you are still paying for it with the equity in your home.

As an example, let’s assume you have a loan of $400,000 and an interest rate of 4.25%. Your monthly payment with principle and interest is $1,967.76/month. If you refinanced to 3.25%, you would save $226.93/month. If your closing costs are $7,000, it would take approximately 31 months to break-even on what you paid for closing costs versus what you’re saving each month. This is calculated by taking $7,000 and dividing it by the $226.93 monthly savings.

Should You Refinance

Based on the above calculation, should you refinance? It depends. Given that the breakeven point is 31 months in the example above, you should consider how long you plan to live in the home or to keep the loan before potentially refinancing again. If you plan to sell in the next couple of years, then it would not be beneficial to refinance. However, if you have no plans to move or refinance beyond the 31 months, then refinancing will pay off in the long run. After the 31st month, the $226.93 will start accumulating. That’s $2,723.16 of savings per year. The savings are greater higher loan amounts, so be sure to perform this comparison with your actual loan amounts.

A Great Credit Score Saves You Money

While you’re trying to decide if it’s a good time to refinance, use this time to work on improving your credit score. The most important things to do are:

  • Pay your bills on-time.
  • Reduce your credit card balances (balances should be 25% or less of available credit limits).
  • Fix any errors in your credit report.

Talk with your financial advisor about other ways to improve your credit score.

So, Is It a Good Time to Refinance?

Ultimately, whether it’s a good time to refinance depends on your personal circumstance. This includes your current interest rate, what new rate you would qualify for, closing costs, and future plans to sell or refinance. The answer will be different for each person. Your first step should be to contact a mortgage loan officer to discuss your qualifications and options. By obtaining an estimate, you can make an informed decision about your mortgage needs.

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Tags: Mortgage Tips, Refinance

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Hagopian Law Group, LLC

Phone: 781.333.5244
Fax: 781.218.2073
Email: melanie@mhagopianlaw.com

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