Mortgage rates are still sitting near all-time lows, and that makes refinancing an attractive offer for many reasons. However, refinancing your mortgage is a significant life decision that can impact your finances for decades into the future. If you're planning to refinance, it's essential to do it for the right reasons, not just because of timing.
Of course, reducing monthly payments is one of the more common reasons homeowners may want to take advantage of lower interest rates. Lower rates will reduce the overall cost of your loan, ultimately cutting the amount you owe to the bank each month. While this is a valid reason to refinance to a lower rate, it's also critical to consider several additional factors.
The Costs of Refinancing
Refinancing your home essentially means rolling your old mortgage into an entirely new one. As a result, you'll have to pay the fees associated with starting a new loan. These fees take many forms, but you'll typically see them placed under the umbrella of closing costs. Some costs, such as loan origination fees, will be based on a percentage of your remaining principal.
You typically have two options to cover your costs: pay the fees upfront or use a "no-cost" refinance. In the latter case, you'll still ultimately need to pay the closing costs. However, your lender will push these fees into your loan, potentially also charging higher interest rates. If you take this option, make sure you understand any additional costs you'll need to pay over the life of the loan.
Regardless of how you choose to cover your closing costs, make sure you factor them into your calculations. Since your goal is to save money on a month-to-month basis, you'll need to make sure that the refinance costs don't exceed your potential savings.
The Advantages of Refinancing
Of course, the reality is that refinancing to a lower rate nearly always pays for itself. You can use a mortgage calculator to visualize the difference even a relatively small rate reduction can make. In most cases, refinancing to a lower rate can save tens of thousands of dollars over the life of your loan, easily outsizing typical refinance closing costs.
It's also critical to remember that your mortgage rate is something that can impact your finance for years or decades if you plan to live in your current home for the long term. Even if mortgage rates drop lower in the future, you'll save more money by taking advantage of lower rates now than you will by waiting for a better deal.
While jumping on the refinancing bandwagon might not make sense for everyone, it's often an excellent way to reduce your monthly payments along with the total cost of your loan. If you take the time to do the math and consider the costs, you'll almost certainly find that refinancing can provide substantial financial benefits.
Reach out to a professional to discuss home refinancing.