Should You Refinance Your Mortgage?

Today’s unprecedented, historically low mortgage rates can benefit homeowners all over the country. More than 18.5 million homeowners meet the borrower criteria to refinance into a lower mortgage rate, which would significantly reduce the total amount of interest they will pay and save them hundreds of dollars per month on average, according to a recent report by Black Knight Inc.

As the COVID-19 pandemic keeps you in the comfort of your home a bit more this winter, it is still a great time to consider refinancing. Many homeowners have the opportunity to save tens of thousands of dollars over the life of their mortgage. Remember: your credit score, DTI ratio (debt-to-income ratio), monthly income, and other financial metrics will be used to see if you qualify.

Why should you refinance — and when? There are many great reasons. Today’s low interest rates can rise just as fast as they fell. You should also take note of the following:

 

  • Net some monthly savings. If you are considering refinancing, you should first compare what your current interest rate is and what the new interest rate would be. In most cases, refinancing should lower your interest rate, which should also lower your monthly mortgage payment. When you look at the total payments during the length of your mortgage, this can add up to a considerable amount.
  • Cancel your Private Mortgage Insurance (PMI). If you put less than a 20 percent down payment when you purchased your home, your investor likely required you to have PMI. However, if your home equity has grown and you have surpassed the 80 percent Loan-To-Value (LTV) ratio, meaning your mortgage amount is equal to 80 percent of your home’s market value, you may be eligible to refinance and drop your PMI. This scenario can also lower your monthly payment.
  • Change the terms of your loan. Maybe there’s 10, 15, or 20 years left on your mortgage. Whatever the number might be, cutting years off of your payment plan might be advantageous to your long-term financial or retirement goals. In many cases, the monthly mortgage payment stays approximately the same because the overall interest rate is lower, but paying off your mortgage earlier than expected is extremely rewarding.
  • Refinancing for cash-out. To accomplish this, you need home equity. Your monthly payment may fluctuate depending on your loan scenario, however, you’ll gain access to the equity in your home by taking cash out to achieve other financial goals like making upgrades and remodeling, paying off or consolidating debt – the choice is yours..
  • Transition from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. If your current mortgage is an ARM product when it was originated, today’s lower mortgage rates could be your financial solution to ensure a fixed, low interest rate for the life of your loan. You may not always save money on your monthly payment, but switching to a fixed-rate mortgage could be an impactful, long-term financial strategy.

Don’t forget that when you refinance into a new mortgage, you pay closing costs on the origination just like you did on your current mortgage. Oftentimes this can be incorporated into your new mortgage amount and monthly payment. In any case, contact your credit union for advice on whether a mortgage refi makes sense for you!

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