It is no secret that interest rates have been extremely low for almost a decade now, but that appears to be changing. The Fed has already started to raise interest rates, and it appears that they will continue to do so over the next few years. So the question is, should you refinance your mortgage now before interest rates rise even further?
Current refinance rates are around 4% for a 30 year fixed and 3% for a 15 year fixed, so if you are near that amount, it will be unlikely you will see sufficient savings due to the added fees and the extension of the loan.
Refinancing your mortgage comes with significant fees (Application Fee, Appraisal Fee, Origination Fee, Document Preparation Fee, Flood Certification – if you need it, Title Search, Title Insurance, and a Recording Fee), so be prepared to pay significant closing costs again (in the neighborhood of $3,000 on a $200,000 refinance). The good news is that you should be able to recoup that expense in just a year or two. So be sure you are planning on living in that house for at least that amount of time!
In addition to these upfront costs, you need to ask yourself if you would rather have lower payments, or pay significantly less in interest. If you simply want to lower your payments, then you can get a new 30 year mortgage. Since you have already made payments, and will be lowering your interest rate, you can potentially lower your monthly payments significantly all while saving on interest. Take the below 2 mortgages.
Mortgage 1 – $200,000 30 year mortgage with 6% interest
Monthly payments $1,199.10 and total interest on the loan will be $231,676.38
Mortgage 2 – $200,000 30 year mortgage with 4% interest
Monthly payments $954.83 and total interest on the loan will be $143,739.01
So by refinancing and extending the loan 30 years, you will save $244.27 each month, which will pay off the $3,000 in closing costs in 12.28 months. You will also be saving approximated $88k in interest!
Just to show you what refinancing into a 15 year fixed mortgage would look like:
Mortgage 3 – $200,000 15 year mortgage with 3% interest
Monthly payments $1,381.16 and total interest on the loan will be $48,609.39
If you can afford it, refinancing into a 15 year mortgage may be your best option, you will save almost $100,000 in interest vs the 30 year mortgage at the lower 4% rate.
Now there are significant factors to consider here that may change whether this is worth it to you. Remember that the amortization of a mortgage has you paying mostly interest in the beginning of the loan. If you have already been paying on your mortgage for a significant period of time (say 10 years), and refinance into another 30 year mortgage, you are extending the interest period (to 40 years) and you may end up paying more in interest in the long run even with the lower interest rate. One way to assess whether it makes sense is to look at how much in interest you have already paid (check your mortgage statement), then add that to the interest you will pay on the new refinanced loan; if it is still sufficiently lower than your original loan, it makes sense to consider the refinance.
When refinancing you also need to make sure you currently have at least 20% in equity (Value of House – Mortgage Remaining), otherwise you may have to pay mortgage insurance points. So if your house has declined in value more than you have paid in mortgage, it may not benefit you to refinance at this time.
Your mortgage is likely your single largest monthly expense, make sure you are getting the best possible deal!