One of the most important factors when applying for a mortgage is the interest rate. Even a small change in the interest rate on your mortgage can be the difference of thousands and thousands of dollars over the life of the loan. If your mortgage interest rate is high, you may be asking yourself should I refinance my mortgage? Well, we are here to answer this questions.
Refinancing Mortgages – Overview
When you apply for a mortgage originally, you may not get the most competitive interest rate. This could be due to multiple reasons. Maybe you did not have a large enough down payment. Or, maybe you did not have the best credit score. Both of these are reasons why you may not get a low interest rate on your mortgage. Another reason is that the interest rate environment could have just been high.
Interest rates on mortgages are affected by your personal finances (i.e. credit score, etc.). They are also impacted by the broader economy. The Federal Reserve, banks, and regulators all work together to determine base interest rates. When the economy is booming, it usually costs more to borrow money (interest rates are high). When the economy takes a down turn, interest rates are usually lowered to stimulate the economy.
Over the last couple of years, interest rates have been artificially low to stimulate the economy. The COVID-19 pandemic is one of the reasons for this. Considering the change in the interest rate environment, and the fact your personal finances might be better because maybe you took the time to improve your credit score, you may want to look into refinancing your mortgage.
Refinancing your mortgage is simply when you trade your old mortgage for a new mortgage. You can change the terms of the mortgage like the pay back period. You can also change the interest rate. This can save you money over the life of the mortgage.
Things to Keep in Mind
If you are asking the question should I refinance my mortgage, here are several things to keep in mind.
Refinancing is Not Free
If you decide to refinance your mortgage, note that it is not free to do so. You will need to pay some fees to do this. Sometimes the fees can cost thousands of dollars. When speaking to lenders about refinancing, be sure to ask what their fees are. So, if you are deciding whether to refinance your mortgage, factor in what these fees are going to be. How long is it going to take before the refinance pays off considering the fees that it cost?
he goal of the refinance is to save enough money in your payment due to the lower interest rate, to compensate for these up front fees. And ideally, then some! So, if you plan to sell your house in the near future, a refinance may not make sense.
What Has Changed?
Before looking into refinancing your mortgage, ask yourself this question. What has changed since you got the mortgage in the first place? If your financial situation is the same, then you may not be approved for a refinance.
For instance, is your credit score better? If you credit score is not as strong as it was when you took out the original mortgage, it will not make sense to refinance.
Also, what is the percent of equity you own in your home? Your refinance may require a certain equity threshold.
Ask your lender or an accountant these questions before you decide to refinance. At the end of the day, it might not be the best time even if interest rates are super low.
What Type of Mortgage Do You Want?
You may not be aware, but there are many different types of mortgage loans out there to choose from. Should you consider a fixed interest mortgage? Maybe you should look into an adjustable rate mortgage (ARM)? The interest rate environment can all be a factor in this. Do you think interest rates will go up? If so, maybe get a fixed rate mortgage. Do you think interest rates have the possibility of going even lower? If this is the case then maybe you should look into an ARM.
Always be sure to talk to your accountant or a lending professional. The type of mortgage that is right for someone else might not be the best one for you.
Your Taxes May Change
If you refinance your mortgage, you will most likely be paying less in interest. This may seem like a good thing, however your taxes may change after you refinance. This is because you can deduct mortgage interest from you income taxes. If you are paying less in mortgage interest, your taxes may be affected.
Should I Refinance My Mortgage – Summary
There are may factors to consider when deciding to refinance your mortgage. Just because interest rates are low may not mean that you should refinance. This is because there are fees you will have to pay, your financial position may not have changed, or maybe it doesn’t make sense due to tax purposes.
We hope this article helped you decided if you should refinance your mortgage. Before you make the ultimate decision, be sure to speak with your accountant or financial advisor. It is also a good idea to speak with at least 3 lenders before