Interest Rates are Rising. Should You Refinance Now?
The old rule of thumb for homeowners used to be: refinance when mortgage interest rates are 2% lower than your current mortgage loan rate. However, refinancing now might still be a good option, even if your current rate is less than 2% higher than current mortgage interest rates. Even a small reduction in the interest rate can reduce your monthly payment. For example, the monthly payment (not including taxes and insurance) on a $150,000, 30-year fixed rate mortgage loan at 7.5% would be about $1,050. At 6.5%, this same loan would have a monthly payment of about $950 – a difference of roughly $1,200 a year.But even if refinancing now can save you some money, should you start shopping around for a new mortgage? Well, the answer depends on your current circumstances, and how long you plan on remaining in your present home.
Do you currently have an adjustable rate mortgage (ARM)? If so, chances are you’ve seen your interest rate – and thus, your monthly payment – go up recently. Now might be a good time to refinance your ARM into a fixed rate mortgage with a consistent monthly payment.
Has your credit situation improved since you obtained your current mortgage? If so, you might qualify for a better interest rate if you refinance your mortgage now.
Has your financial situation improved since you obtained your current mortgage, making it possible for you to pay a higher monthly payment? If so, you might consider refinancing your current mortgage into a shorter-term mortgage loan. The higher payments and shorter term will allow you to build equity in your home at a faster rate, and also help you save a substantial amount in interest payments over the loan’s term.
Conversely, if you have one of the shorter-term mortgages – such as a 15 year fixed rate mortgage – and you’re having a hard time making the payment each month, you might consider refinancing into a longer-term – such as a 30 year fixed rate mortgage. Just keep in mind, although your monthly mortgage payment may drop, you’ll most likely end up paying more in interest over the life of the loan.
Need to free up cash to cover other expenses? If so – and you have equity in your home – you might consider refinancing your current mortgage into one with a larger principal, in order to turn some of your home’s equity into cash.
Remember, even if your current circumstances seem to indicate a mortgage refinance would be beneficial to you, refinancing a mortgage will cost you money in the short term. If you don’t plan on staying in your present home long enough to recoup these costs, then a mortgage refinance might not be a good choice. However, if you plan on staying put, refinancing your mortgage now – before rates climb any higher – could be a savvy financial move.
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