Crossroads Planning

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With Interest Rates Nearing Historic Lows, Is Now the Time to Refinance?

Interest rates are at their lowest point in years, causing many homeowners to take a second look at their mortgage. If you’ve been considering refinancing your home, now may be the time to do it. 

However, are interest rates going to continue to drop? 

More importantly, is refinancing the best option for you and your family? Let’s look at a few ways to answer these questions and help you decide if now is the time to refinance.


Will Interest Rates Continue to Drop?

Many economists predicted that COVID-19 would not cause mortgage rates to fall below 3%

Time proved them wrong. 

As of the latest data, average 30-year mortgage rates are at 2.98% — and they will likely stay there well into 2021. However, predicting whether mortgage rates will rise again or continue to drop in the years to come is difficult. COVID-19 struck an unprecedented blow to the global economy. Once the United States (and the rest of the world) recover from the pandemic, it’s hard to say with certainty if interest rates will bounce back. Even if they do, it’s even harder to come up with a realistic timeline for when that might happen.


Is Now a Good Time to Refinance?

If you’re just looking at current interest rates, the answer is “yes.” However, everyone’s financial circumstances are different. What works for one person may not work for another. 

So, let’s look at a few other factors you should consider:

  • Look At Your Mortgage

Whether or not you should refinance your home will largely depend on the current state of your mortgage. 

For example, what’s the current interest rate on your loan? How many years do you have until your mortgage is completely paid off? 

Generally speaking, you should only refinance if you can shave your interest rate by at least 1% (ideally 2% or more) and you have at least 10 years left on your mortgage. You will have to pay various fees to refinance your home, so if you’re close to paying off your loan or you won’t see a significant change in your interest rate, you probably should not refinance.

  • Think About Your Retirement

Another factor to consider is your retirement. Ideally, you want to pay off your mortgage the same month you retire.

Once you retire, you’ll probably see a significant drop in your income. 

Less income means that it will be harder to make your monthly payments. That said, if you can refinance your mortgage to shorten the length of your loan and pay it off before you retire, you might want to take advantage of today’s low interest rates.

  • Find Your Breakeven Point

As previously stated, you will have to pay fees to refinance your home. The breakeven point represents the time at which your savings have recouped the cost of refinancing. 

For example, let’s say that it will cost you $5,000 to refinance. With the lower interest rate, you’re saving about $250 per month. 

All you have to do is divide the cost by your savings to find the breakeven point (in months). 

In this example, your breakeven point would be 20 months (or a little less than 2 years) from the time that you refinance. In other words, you won’t actually see any savings from the refinance until 20 months have passed.

If your breakeven point is far away, it could mean that you’re not getting that much in savings. In fact, if you don’t reach the breakeven point before the end of your existing loan, it means that the refinance is actually costing you money.

  • Calculate Your Mortgage Points

Mortgage points refer to the fees paid to a lender in exchange for a lower interest rate. One point is equal to 1% of your mortgage amount. In essence, mortgage points force you to pay some interest upfront so that you can end up paying less interest for the remainder of your loan. 

*Pro Tip: Mortgage points can be amortized over the course of the loan. 
                   (Speak with your accountant to learn more).

So, calculate your mortgage points. How many points do you have to pay upfront? Is it feasible for you to pay them without hurting your budget? Would paying these points make it difficult to see any savings from the refinance? 

If you have to pay a large sum upfront and your new interest rate is not significantly lower than the old one, the refinance probably isn’t worth the trouble.


The Bottom Line

Refinancing your home is a big decision. You shouldn’t assume that low interest rates mean that you should definitely refinance. Instead, you need to look at your own finances, mortgage, and the potential savings of refinancing to see if it’s the best choice for you.

If you’d like to learn more about refinancing your home, consult the experts at Crossroads Planning today!

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