"Should I refinance?” is one of those age-old financial questions that’s truly difficult to answer.
The average rate on a 30-year fixed-rate mortgage has fallen since the COVID-19 pandemic in 2020, so it’s only natural to begin considering your options. Here are three questions to ask yourself to figure out if now is the right time:
1) How much have rates fallen since you closed on your current mortgage?
Mortgage rates are hovering in the mid-three-percent range now. If your mortgage rate is more than 1.5% above that, it’s probably time to talk to a mortgage lending advisor.
Keep in mind that each time you get a new mortgage, it requires a current home appraisal and a new round of loan closing costs. These extra out-of-pocket expenses can outweigh the savings you get from a lower rate in the short term. And, if you plan to look for another house in the near future, refinancing may not be your best move.
2) Has your house increased in value since you closed?
If yes, this could be a good opportunity to look at a “cash-out” refinance which takes advantage of the equity you've built in your home. This means borrowing more than what you owe on a new mortgage and you're able to pocket the difference with a check at closing.
This could be an affordable way to pay down high-interest debt, like credit cards. You could also use the funds to make home improvements, which adds more value to your greatest asset.
3) Can you afford to shorten your loan term?
There's no rule that says you have to refinance for another 30 years. You might be able to shorten your loan term to 15, 20, or 25 years and keep your monthly payments close to what you’re currently paying.
This helps build equity faster and decrease the total amount of interest paid over the life of your loan; a win-win!