Is Now the Best Time to Refinance?
Most analysts agree that today’s extremely low mortgage rates will soon begin to rise. So should you refinance now to lock in the best rate on your mortgage? If you were planning to do so anyway, sure. But the bigger question is whether a refinance (also known as a remortgage in the UK) makes sense for you in the first place.
In some cases, refinancing almost always makes sense. Let’s say you have an adjustable-rate mortgage (ARM). ARM’s are extremely risky, as your rate and monthly payment can increase greatly when the loan adjusts. In a split second, your manageable $1500 monthly payment can turn into a crippling $3000 payment. If you have an ARM, you should refinance to a fixed rate as soon as possible, period.
If you already have a traditional, fixed-rate mortgage, you’ll need to do some calculating to determine whether it’s worthwhile to refinance. Here is some key information you’ll need to know: 1) how long you expect to own your house, 2) what rate you can expect on your new loan, and 3) how much you expect to pay in fees. A lender can help you estimate the last two.
Once you have estimated these, you are ready to calculate your break-even point. This is time it will take for your monthly savings to exceed to amount you will pay in fees to refinance. Here’s how:
- Use a mortgage calculator to estimate your new monthly payment.
- Subtract the new payment from your current payment to see how much you’ll save per month. For example, if your current payment is $1500 and your estimated new one is $1350, your monthly savings is $150.
- Divide your estimated refinancing fees by your monthly savings. In our example, if the refinancing fees are $2745, we divide by our monthly savings of $150 for a breakeven point of 18.3 months. This means it will take us about 18 months to break even on this refinance.
If we plan to keep the house much longer than 18 months, it makes sense for us to refinance. Otherwise, we stay with the current loan.
Other factors like taxes can complicate things a but, but calculating your breakeven point is a good rule of thumb for deciding if a refinance is a good move for you. If so, then don’t wait to lock in your rates. They have nowhere to go but up.
