Should I refinance?
Mortgage and refinance rates are rapidly falling this week (February 25, 2020).
In fact, 30-year fixed rates just hit their lowest point in 8 years — dropping to about 3.3%. Home financing hasn’t been this affordable since 2012.
So, should you pull the trigger on a refinance to lock in a near-record low rate?
Here’s how to decide for yourself.Find and lock a low refinance rate today (Sep 19th, 2020)
Refinance strategies (Skip to…)
- When to refinance
- Break-even refinance method
- Cash-flow refinance method
- No-closing-cost refinance method
- Other benefits of refinancing
- Refinance rates today
When to refinance
The general rule of thumb about refinancing is that if it saves you money, you should probably do it.
Even if you just recently bought the home or completed a refinance, it’s probably not too soon to find yourself a better deal.
That said, refinancing isn’t a flip of a switch. It takes some time, and there are closing costs and paperwork to consider. You’ll have to weigh the benefits of a refinance against the pay-in to make your decision.
There are a few ways to tell whether a refinance is worth the effort for you:
- Break-even: If savings and closing costs will even out and you’ll start seeing returns while you’re in the home
- Free up some cash: If you can refinance into a lower payment and free up your monthly cash flow
- Refinance for free: If you can find a refinance program with little or no closing costs
Start by clearly defining your goals. Know what your financial objective is, and how a refinance will help you get there.
Then check refinance rates available to you.
If they’re significantly lower than your current rate, a refinance is likely worth it.Find and lock a historic low refinance rate (Sep 19th, 2020)
Strategy 1: The break-even refinance method
Your biggest consideration when refinancing will probably be closing costs. As with the original mortgage, closing costs for a refinance can easily total a few thousand dollars.
With that in mind, the first question to ask yourself is:
Will I stay in the house long enough after refinancing to recoup my closing costs?
You can get a simple answer to this question by dividing your closing costs by your estimated monthly savings. For example:
- Refinance closing costs and fees: $3,000
- Monthly savings: $300
- Time to break even: 10 months
In this scenario, the homeowner won’t start seeing savings until 11 months in. If they’re planning on staying in the house for another few years, a refinance is probably in their best interest.
Here are a couple more tips for calculating your refinance savings:
- Closing costs to consider include title, escrow, and lender fees. Ignore prepaid items like taxes and insurance, since you’ll have to pay those anyway
- Look at your interest savings, not your payment savings. The goal is to pay significantly less in interest over the life of the loan, not just to lower your payment
If you’re planning on moving or selling before you’ll break even, take another look at your goals.
There might still be reasons to refinance (like freeing up your cash flow, below), but it’s more likely to be a wash. You might wait till interest rates drop a little lower and you can break even faster.
Strategy 2: The cash-flow refinance method
Saving money over the life of your loan is a great reason to refinance. But it’s not the only one.
Say you’re a few years into your mortgage, and really struggling with monthly payments. (It can happen to anyone.)
Refinancing into a new 30-year term might increase the amount you pay over the life of the loan. But if it lowers your monthly payment and frees up some day-to-day cash? Refinancing might be worth it anyway.
Here’s an example of how this type of refinance might shake out:
|Original mortgage||Refinanced mortgage|
|Remaining term||23 years||30 years|
|Total interest remaining||$190,000||$215,000|
This homeowner would save $400 per month by refinancing. That extra cash can make a meaningful dent in monthly bills and living expenses. It could make all the difference in affording their home.
However, refinancing into a new 30-year term also means this person would pay an extra $25,000 in interest over the life of the loan.
Whether or not this type of refinance is worth it depends on your unique situation.
The important thing is that you’re fully aware of both the short- and long-term effects on your bank account before making a decision.
Strategy 3: No-closing-cost refinance
There’s one more surefire refinance strategy: The no-closing-cost refinance.
Believe it or not, any lender can offer you a refinance with no closing costs. But it’s not exactly a free lunch.
A no-closing-cost refinance still technically has closing costs. You just don’t pay them upfront.
You can either finance the closing costs (paying them off over the life of the loan) or accept a higher interest rate in return for the lender covering your upfront fees.
That might sound backward, considering that you’re probably refinancing because you want a lower rate.
But if rates are low enough, you can likely see a slight uptick and still save a lot in interest in the long run.
For example, imagine you’re refinancing a 30-year, fixed-rate loan of with a balance of $300,000 and a 4.75% interest rate:
|Refinance with closing costs||Refinance with no closing costs|
|New interest rate||3.75%||4%|
|Total interest savings (over 30 years)||$93,400||$77,800|
Paying $3,000 in closing costs would save this homeowner more over the life of the loan, of course.
But if they can’t (or don’t want to) pay $3,000 out of pocket, they can still save more than $70,000 over 30 years with a no-closing-cost refinance. That’s not a bad deal.Verify your new rate (Sep 19th, 2020)
Good reasons to consider a refinance
The three strategies above should help you figure out whether a refinance is “worth it” based on the interest you can save.
But a refinance can help you with other financial goals, too — aside from just reducing your mortgage payments.
Here are just a few good reasons to consider refinancing your mortgage:
- Cancel mortgage insurance: You can use a refinance to get rid of mortgage insurance (either PMI or MIP) if you’ve built enough equity in the home
- Reduce your loan term: You can pay off your home sooner by refinancing to a 20, 15-, or 10-year mortgage. Rates are usually lower, but your monthly payment might go up since you’re paying off the loan with fewer payments
- Get out of an ARM and lock low rates: Adjustable-rate mortgages usually start with low rates, but they can spike later. Refinancing into a fixed-rate loan can help you lock in a low rate for the rest of your term
- Get cash out: As you pay down your mortgage, your home equity grows. A cash-out refinance lets you access some of that equity money to pay for renovations, kids’ college tuition, or other big-ticket items
- Consolidate debt: You can also use a cash-out refinance to pay off high-interest debt, like from credit cards or personal loans, at a lower interest rate. Use extreme care with this method, as it’s easy to run debts back up and end in a worse place than where you started
- Pay off liens, second mortgages, or judgments: If you’ve taken out a second mortgage (“piggyback” loan), home equity line of credit, or other judgment on the property, you can use a cash-out refi to pay these things off
You can learn more about these refinance strategies in our complete guide to refinancing a home.
Refinance rates today
Refinance rates today are near record lows. 30-year fixed rates are below 3.5% on average, according to Freddie Mac.
This historic drop is largely due to coronavirus fears. And refinance rates so low might not last long.
So if it seems like a refinance would be worth it for you, now is a good time to lock in your rate.
Compare refinance rates from a few lenders to find the best deal for you.Verify your new rate (Sep 19th, 2020)