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Is It Time To Refinance My Mortgage?

During the first week of March, mortgage rates fell to their lowest level in 50 years. Fears of economic damage stemming from the coronavirus led the U.S. Federal Reserve to cut interest rates, which caused the bond yields that banks use as a benchmark for mortgage rates to drop as well.

Here in South Georgia, you may be wondering if it’s time to refinance your mortgage.

What To Know

The lower the interest rate on a mortgage, the lower the monthly mortgage payment is. Mortgage refinancing is usually done when interest rates have fallen enough to make your monthly mortgage payments lower than they currently are – in other words, when it makes good financial sense to do so.

If your current 30-year fixed-rate mortgage is for $100,000 at a 9% interest rate, for instance, your current monthly principal and interest payment is $804.62. If you refinance at a fixed 4.5% for 30 years, the monthly note payment falls to $506.70, nearly $300 less per month.

A mortgage refinance involves paying off your current mortgage and then obtaining an entirely new mortgage. In other words, it isn’t simply changing the numbers on your current mortgage.

How To Determine If I Should Refinance

Although lowering your monthly payment may sound very good, the decision is a very individual one. You need to evaluate your situation to see if a mortgage refinance makes sense for you.

Because you are obtaining an entirely new mortgage, refinancing comes with fees and costs, just as getting a mortgage for the first time does.

A mortgage refinance can require application fees, appraisal fees, mortgage origination fees, attorney fees, title insurance and search costs, and more. Refinancing fees generally equal from 3% to 6% of your mortgage loan’s principal balance. If you have a $100,000 mortgage, your costs can be $3,000 to $6,000.

As a result, refinancing is usually only a good financial move if you plan to stay in the home long enough to at least break even with the refinance costs and fees and start saving money. If your refinance costs $3,000, for instance, and you save $200 each month, your breakeven point is 15 months.

While the breakeven point is important, it isn’t the only important consideration. Bankers usually advise refinancing only if your new mortgage’s interest rate is at least 1% lower than your current one.

You also need to think about your personal finances. Can you swing the costs of a refinance right now? Do lower payments justify the costs? What is your current credit score? Banks usually like to see a strong credit score, just as they do for a first mortgage.

Terms To Look for When Refinancing

In addition to lower interest rates, mortgage refinancing can also be a chance to get more advantageous terms.

You can get a shorter term if that works for you. If you currently have a 30-year mortgage, your refinanced mortgage can be for 15 years instead. If the new interest rates are considerably lower than what you’re paying now, monthly payments on a 15-year may not be much higher, and in exchange your mortgage will be entirely paid off in 15 years.

If you currently have an adjustable rate mortgage (ARM), you can also convert to a fixed-rate mortgage when refinancing. ARMs often have low introductory interest rates, which can be advantageous. But the rates can rise over time, which means you will pay more.

If you have a balloon mortgage, you’ll be required to pay off the principal at some future point. That has potential to create financial hardship. You can get a fixed-rate mortgage during a refinance, which can create more financial stability.

All in all, there is a lot to consider when thinking about if you should refinance. Here at CBC Bank we offer a variety of mortgage products and can help you understand which would work well for you.

The Bottom Line

The bottom line is that refinancing can be an excellent choice, depending on your housing plans and your financial situation. A refinance can result in lower payments and better terms for you.

But the decision is a very individual one. If you’re planning to move soon, your mortgage payments wouldn’t drop much, or your financial situation or credit score need to change to qualify, now might not be the time to refinance.

CBC Bank is happy to work with you on the refinancing process. We’ll answer your questions straightforwardly, and help you figure out when a refinance makes sense for you. Give us a call today to speak with one of our mortgage lenders.