Mortgage rates have hit an all-time low. Does it make sense to refinance?
Mortgage rates are closely tied to the 10-year Treasury note which last week dropped to a new low of under 1%. This translates to an average 30-year rate of 3.29% and 2.79% for 15-year loans according to the Wall Street Journal. That signals good news for anyone that is looking to buy, allowing new homebuyers to cheaply borrow.
What about if you already have a mortgage, when does it make sense to refinance? It’s easy to get caught up in all of the hype about low rates, so here are three questions to ask yourself before seriously considering a refinance.
How long do you plan to stay in the home?
The longer you plan to stay in your home, the more likely you are to see the benefit of refinancing. Why? There are closing costs involved. It will likely take you some time to recoup the costs of refinancing or breakeven. If you plan to move soon (within the next couple of years or so), it may not make sense. The longer you plan to stay in your home the more time you’ll have to recoup closing costs and enjoy the benefit of a new lower interest rate.
What is the outstanding value of your mortgage and what’s the value of your home?
In order to refinance without increased costs, you’ll want to make sure that your loan-to-value (LTV) ratio is 80% or lower. In order to quickly calculate your LTV simply take your outstanding mortgage balance and divide it by the appraised value of your home. If your LTV is over 80% it doesn’t necessarily mean that you can’t refinance. You may incur what’s called Private Mortgage Insurance (PMI), which translates to increased overall costs.
What are the anticipated closing costs?
It’s best to have an estimate of anticipated closing costs. Here in Virginia, the average closing costs run 2-3% of the loan value. Keep in mind, these costs can vary by state and by the type of loan you select. If you’re not quite ready to contact a lender, smartasset.com and finder.com have some closing cost calculators to help give you a better idea of what to expect. When it comes to closing costs you will also want to determine if you will pay these costs from cash or roll them into the loan.
So what are the next steps? Once you’ve determined how long you’ll stay in your home, your LTV and your estimated closing costs, start running some calculations. One of my favorite sites for mortgage calculators is www.mortgageprofessor.com. You’ll be able to clearly see how long you will need to stay in your home in order for a refinance to make sense.
As you can see, it’s not as simple as picking a lower rate. Make sure you’re aware of the real numbers before making the decision to refinance.
Interested in learning more? Read more about my firm, and check out my service options.
Christine Centeno, CFPⓇ, MS is the founder of Simplicity Wealth Management. She has over 12 years of industry experience as a financial advisor and is a member of several professional organizations including NAPFA, FPA, and the XY Planning Network. She also holds her Masters in Financial Planning. In 2019, after years of working for large firms, she founded her own firm. Simplicity Wealth Management provides clarity to the complicated nature of financial planning and investing by delivering comprehensive advice without hidden fees and unnecessary jargon that leaves you in the dark. The goal is to deliver transparent, easy-to-understand guidance to help clients achieve their financial goals and remain informed every step of the way.
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