Many people consider refinancing their home when interest rates fall, and right now they’re historically low. One common rule of thumb is that refinancing is a good idea if you can reduce your rate by at least 1%, but you should consider it for even smaller decreases in rates depending on your situation and the value of your home.
One of the most common reasons to refinance is simply to lower monthly payments. A lower rate means less money going to the lender and more staying in your pocket and building equity in the home.
Another common reason is to shorten the term of the loan. Depending on your current rate you could move from a 30-year loan to a 20- or 15-year with only a small increase in your monthly payment, meaning you’ll own your home sooner and pay less total interest.
Borrowers also refinance to change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa. Fixed-rate loans have interest rates that never change. ARM rates may go up or down throughout the term of the loan. Moving from an ARM to fixed-rate can lock in a low rate and eliminate concerns about future hikes, especially for those planning to stay in their homes for the foreseeable future. On the other hand, moving from a fixed-rate to an ARM can be a good way to get that monthly payment even lower if you think you may be moving in a few years. However, refinancing can cost 3% to 6% of the loan’s principal, so if you think you’ll be moving in two years, but it will take three years to recover the refinancing costs, it may not make financial sense.
A quick way to get a gauge on whether refinancing makes sense for you is to take a look at one of the many mortgage refinancing calculators available online. Then, reach out to your lender or financial advisor to find out what’s right for you.
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