Not so long ago, homeowners had the opportunity to get record low interest rates on their mortgage. The average interest rate on a 30-year fixed mortgage was just over 3 percent in 2013, according to the Federal Reserve Bank of St. Louis (FRED). Rates started to climb again in 2014, and they were above 4 percent in February. You might be worried that you missed your chance for getting a refinance mortgage, but it still might not be too late to refinance your loan and lower your monthly payment.
Look at your interest rate
Your current interest rate is one of the most important things to look at when you decide whether a refinance mortgage works for you. Suppose you took out your original mortgage when interest rates were above 5 percent and you still have a way to go until the debt is paid off. In this scenario, it might make sense to refinance the loan. Even though you’re unlikely to get the jaw-droppingly low rates of years past, you’ll still be lowering your rate and saving money on your payments.
Fixed vs. adjustable rate
If your current interest rate is similar to the rates now available, it might not be in your best financial interest to refinance unless you are in an adjustable rate mortgage (ARM). If you have an ARM, you may try to predict how the rate will change. If you expect that your interest rate will increase considerably the next time it changes, you may find that it is more cost effective to refinance to a fixed rate loan because you’ll lock in the current rate.
Changing your mortgage to an ARM might also save you a considerable amount of money when it comes to interest rates. The average interest rate on a 5-year ARM hovered around 3 percent at the beginning of 2014, according to FRED. If you plan to remain in your home for no more than 5 years before selling or refinancing again, switching to an ARM can save you money now.
Saving on closing costs
High closing costs are often a deterrent when it comes to refinancing. Getting a mortgage with an interest rate that is 0.5 or 1 percent lower than your current rate doesn’t always make sense if you have to pay thousands of dollars in closing costs. Depending on how much you save each month on your mortgage payment, you might have to stay in the home for many years to recoup the closing costs. BrightPath offers a refinancing option with no closing costs. This allows you reap the benefit refinancing without paying thousands of dollars up front.
You should calculate your break-even point, or how long you will need to stay in your current home for a refinance to make sense. You might find that refinancing now and remaining in your home for the next 5, 7 or 10 years is the best option for you and your wallet.
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