Even if you aren’t thinking about buying or selling your home soon, you’ve probably seen that mortgage rates have hit record lows. And if you’re a homeowner, you can actually benefit from these low rates by refinancing your mortgage, which can save you thousands of dollars in the long run.
Here’s everything you need to know before you refinance.
Is Refinancing Your Mortage a Good Idea?
To put it simply, refinancing your mortgage involves altering a loan so it has more favorable terms. Many homeowners try to refinance to lock in lower interest rates, especially if they still have quite a few years left on their loan.
However, even as mortgage rates continue dropping to record lows, refinancing may not be a good idea for your individual situation.
Make sure you can break even
Refinancing your mortgage comes with closing costs, so it’s kind of similar to the process you went through when you first bought your home. Because of this, you’ll want to crunch a few numbers and make sure that you’ll break even by refinancing.
As a rule of thumb, you’ll want to refinance if you can get an interest rate between 50 and 75 basis points lower than your existing one. Even then, it will still take a few years for you to recoup the cost of refinancing.
Pay attention to terms
Typically, 30-year loan terms are the most popular choice amongst homebuyers. And while it might be tempting to stick with that timeframe, switching to a 15-year term could be more advantageous.
Although 15-year loans do come with larger monthly payments, they also have much lower interest rates. In fact, today’s average 15-year loan has an interest rate of just 2.516%—that’s over half a percent less than a 30-year loan! While this may not seem like a lot, it can make a huge difference in your monthly payments over time.
Don’t shy away from closing costs
Refinancing may seem like a big upfront investment, but if you still plan on staying in your home for a while, the savings can add up. You’ll likely have to pay a few extra charges, like application, origination, and recording fees, but the reduction in your monthly payments can help you earn all that money back.
Apply with caution
The ever-shifting economy has caused many homeowners to refinance their loans in an effort to save money. But to prevent another mortgage crisis akin to 2008, lenders have made it more difficult to qualify for a new loan.
If you’ve recently lost your job or are facing economic hardship, it could be harder for you to refinance due to stricter credit score and income requirements. Experts recommend giving your current lender a call—they’ll be inclined to give you more favorable terms so you’ll remain a customer.
Avoid forbearance if you want to refinance
The recently passed CARES Act allowed millions of Americans to defer their mortgage payments, a process that’s known as forbearance. However, if you signed up for a forbearance plan or skipped on your payments, it could keep you from refinancing your mortgage.
As long as you keep making payments during your forbearance plan, you should be able to refinance. If you don’t, most lenders will require you to make up at least three payments before beginning the refinancing process.
Don’t wait to refinance
Many homeowners are waiting to finance because they think that rates will continue to drop. While this is a prudent strategy, it’s difficult to predict what will happen as we continue to navigate these turbulent times.
There’s no guarantee that rates will continue to decrease, so it’s best to refinance while they’re still shockingly low.
Thinking About Buying, Selling, or Refinancing?
Whether you’re thinking about listing your Dallas home or just want to learn more about refinancing, you can trust Glazer’s Realtors to offer plenty of advice. We have countless resources to help you get started, so just reach out to us with any questions!