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Does It Make Sense to Refinance?

March 24, 2022


Does It Make Sense to Refinance?

You may have heard that interest rates have had an ever-so-slight rise, which might leave you wondering if the window has passed to refinance your mortgage. The good news is – probably not. Here’s what you need to know about a potential mortgage refinance.

Reasons to Refinance a Mortgage

There are four reasons you might want to consider a mortgage refinance:

1. To get a better interest rate

Even with slightly rising interest rates, many homeowners will still be saving money by refinancing. What do interest rates have to do with your mortgage payment? Interest is the amount of money you pay on your mortgage loan to compensate your lender for allowing you to borrow money. Interest rates go up or down depending on the economy, which can affect your payment.

So, despite rates beginning to inch up, we are still in an environment with historically low interest rates which could lead to a lower monthly payment and more money in your pocket. Now is a good time to check your current rate versus the rates that are being offered to see if refinancing would allow you to lower your payment.

Also, if your credit score has improved, you may be eligible for a better rate than you were in the past.

2. To move from an “adjustable” mortgage to a “fixed-rate” mortgage

There are two basic types of mortgages: fixed-rate mortgages, which have the same interest rate for the duration of the loan, or “adjustable” mortgages, where you start with a lower interest rate that fluctuates over the life of your loan.

If you anticipate you will not live in your home for the entire duration of your loan, an adjustable-rate mortgage could be a smart choice. After all, why pay a high amount of interest now, when you can pay a much lower interest rate for the five or so years you plan to live in your home.

However, even if an adjustable-rate mortgage was a good idea at the time you got it, you may
find that your circumstances have changed, and you plan to stay in the house longer than you had originally intended – maybe you are settled into a school district your kids really love or you are able to work remotely so no longer need to relocate.

On the other hand, securing a fixed rate mortgage ensures your monthly payment will not increase. You pay more for this peace of mind because the interest rate on fixed rate mortgages is often higher than the rates available for adjustable-rate mortgages. It’s sometimes a difficult decision so talking to a mortgage professional about different options that are available can shed light as to whether moving from an adjustable rate to a fixed rate would be a good idea.

3. To shorten the length of your term

When buying a home, many people choose a conventional 30-year term loan to give them the lowest monthly payment. Yet over time, it often makes sense to refinance into a short-term loan like a 15-year loan. While your monthly payment may increase, this decision often saves a homeowner tens of thousands of dollars in interest. 

4. To tap the equity in your home

One type of loan, called a “cash-out refinance,” allows you to access some of the equity that’s tied up in your home if it has increased in value since you purchased it. You’ll apply for a new loan higher than your existing mortgage, but less than your home’s value. Then, the money you borrow is used to pay off your original loan and you have the rest of the cash to use for another purpose; like a remodel, installing a swimming pool, or your child’s education. 

What To Consider Before You Refinance

There are two main things to consider to help you decide if refinancing is right for you:

Your potential interest rate compared your current interest rate

If you obtained your mortgage or refinanced recently, you might already have the best possible rate. Yet, since interest rates are still very low, you may still be able to lower your monthly payment. One rule of thumb is that you should consider refinancing if you can lower your interest rate by at least 1%. Our mortgage calculator can help you get started.

Your break-even point

The second key point to consider is your “break-even” point.  Specifically, a refinance can cost thousands of dollars.  So, by refinancing and getting a lower payment, how many months will it take to break even with the cost of getting the loan.

To find that point, take the total refinance cost and divide it by the monthly savings. Say your mortgage refinance will cost $4,000 in fees, but you are saving $200 a month. That puts your break-even point at 20 months, or less than two years. If you’re planning to stay in your house for at least five years, that refinance could make sense.

Want to find out if refinancing your mortgage makes sense for you?  Valley Strong Credit Union is the place to go for the options and service you are looking for. Contact us today to speak with a local mortgage loan officer about your goals. Or use one of the interactive tools on our website, like our online payment calculator, to learn more about the product and payment types available.