Why you should look at refinancing now (Part I)
Is it time to refinance? With rates at historic lows, it’s certainly something to consider. And even if you’ve already refinanced, it may be a good time to take another look to see if rates in your area have gone down even further.
Naturally, rates will vary depending on where you live, dwelling type and your loan-to-value, but it isn’t uncommon to see rates come in at low-to-mid 2’s in this environment and certainly below 3%. In some cases, in geographic regions where lender competition is high, buoyed by stable/growing home prices with strong loan-to-value ratios and a qualified borrower, refinance rates can even dip down below 2%!
So what should you be evaluating as you assess whether refinancing makes sense for your specific scenario?
Consider your overarching goals:
The most fundamental question to start with is whether you plan to be in the home for some period of time, at least longer than the break-even period. This is the point when the costs to refinance equal the monthly and/or interest savings. A good starting place is around ~2-3 years and beyond on the timeline.
Even if you don’t see yourself living in your current home for that long, it still may make sense to refinance, especially if you plan to keep your home and rent it out. You may need to do a bit more napkin math to ensure the benefits outweigh the cost.
Take stock of where you are today:
While this may sound obvious, be sure to break out your mortgage statement and have a clear understanding of where you sit today.
What is your monthly payment?
What is your current principal balance?
What is your current interest rate?
Are you paying private mortgage insurance because you put less than 20% down? If so, how much is this?
Is your mortgage company paying your property taxes and homeowners insurance? How much is going to each?
This is important because we want to make sure we are comparing apples to apples and not throwing in an orange or two in, muddying the comparison.
Not to open another can of worms, but when was the last time you reviewed your homeowners insurance? Have you done a quick estimate to see what your home is currently worth? The algorithms aren’t perfect, especially if your home is brand new or you’ve done extensive renovations, but they can be a great starting point. I recommend looking on Zillow, Redfin, and Realtor.com.
Run a preliminary search on where rates are today:
Look at where rates stand in your area given your situation. Armed with the information from the earlier steps, consider checking out different marketplaces and generating a short list of where to get a full quote, such as: Zillow, Bankrate, and NerdWallet. At first glance, how do these rates compare against your current rate?
One rule of thumb that I’ve heard repeated time and time again is that you should only consider refinancing if you can beat your current rate by 1% or more and while this is true, not pursuing the refinance because it comes in at 0.875% lower seems a bit foolish. There may be other reasons why you may want to refinance and not adhere to that rule, including:
Refinancing from a loan where you are currently paying private mortgage insurance and your home has appreciated to the point you can remove it (80% or lower loan-to-value)
You are looking to fix the rate because you currently have an adjustable rate mortgage
You are looking to extend the term to free up additional cash monthly (from a 15-year to a 30-year, as an example)
You may be changing jobs in the near future which would impact the underwriting process
You’re interested in doing a cash-out refinance to fund other financial goals
Refine your search and obtain a few estimates:
The goal here is to pursue a shortlist of companies that have attractive preliminary rates and closing costs, and obtain a full quote that includes not just the interest rate but also the entirety of the closing costs itemized. You may want to obtain a full quote from each of the following:
Your current lender to see how they stack up
A big bank such as Chase, Bank of America, Wells Fargo, etc.
A regional player, like First Republic or Union Bank in California
A volume-oriented lender found through an online marketplace (Zillow, Bankrate, etc.),
Be sure to obtain a quote in writing (i.e. in an email) so you can easily share it with the competition, make them earn your business! Don’t be afraid to pit two lenders against each other, you’d be surprised how much wiggle room can suddenly appear.
Once you have those quotes in hand, now it’s time to crunch those numbers and see what makes the most sense given your goals and priorities.
