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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, not surprisingly, depends on several factors, most notably your financial health, your current mortgage interest rate and how long you plan to stay in your home.
Your Finances
Before deciding to refinance, take a honest look at your current financial health. Have you been paying your bills on time every month or have been late or missed several payments? Do you have tiny credit card balances or have you run up mountains of credit card debt?
Your ability to qualify for low mortgage interest rates that you see advertised online or in your local newspaper depends heavily on your three-digit credit score. That score will not be strong if you have a recent history dotted with missed car loan payments and soaring credit card balances.
To qualify for today’s lowest rates, you’ll need a credit score of 740 or higher on the commonly used FICO credit-scoring system. If your credit score is much lower than that, you might not qualify for an interest rate low enough to make refinancing worth your while.
Your Current Interest Rate
Interest rates, of course, play a key role in whether you can justify refinancing your mortgage. If you can significantly reduce the interest rate on your mortgage, you can realize dramatic savings 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.
However, if your original $200,000 mortgage had an interest rate of 5 percent and 60 months later you lowered it only to 4.5 percent by refinancing, you’ll only save about $143.07 a month. That might not be worth the time and money of refinancing.
Remember, refinancing your mortgage costs a significant amount of 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. You want to make sure that you’ll be saving enough money to pay back those fees over a reasonable period.
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 your savings pay back those costs.
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