After many months of anticipation, interest rates have finally dropped. In September, the Federal Reserve cut its benchmark rate by 50 basis points, lowering it to between 4.75% to 5%, as written in a press release by the Federal Reserve System. This is a significant decrease. This year, we saw interest rates reach as high as over 7%.
When interest rates plummet, many homeowners consider refinancing their mortgage to get a lower interest rate on their loan. How and when is this a financially savvy move? GOBankingRates spoke with real estate experts to find out.
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Make Sure You’re In a Secure Financial Place
Another good time to refinance is if your financial situation has improved significantly since you took out your last mortgage loan.
“For example if your credit score is much higher and your income has increased notably, then you may want to refinance your mortgage and secure a much better rate,” said Seamus Nally, CEO of TurboTenant. “Doing this can then lower your mortgage payments and total money spent on interest, so it is worth looking into if your financial situation has improved in such a way.”
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Review Your Current Mortgage Loan and Compare Interest Rates
Refinancing a mortgage loan only makes good sense if you can get a lower interest rate than what you already have. So, say you took on a loan with 7% interest — a very high rate — refinancing could make a lot of good sense. Review your current mortgage rate and terms to see if refinancing will save you cash.
“Weigh the payments against what a new payment could be if you refinance,” said Omer Reiner, licensed realtor and president of FL Cash Home Buyers, LLC. “It can be a way to save cash that can be used for other bills or maybe saved up for a vacation.”
Refinance Only If Your New Interest Rate Will Be Much Lower, But Consider Costs
Keep in mind that refinancing is a complicated and time-consuming process. It’s also not free; you will need to pay closing costs along with other fees.
“Before refinancing, homeowners should weigh closing costs, which can range from 2 to 5% of the loan amount and how long they plan to stay in the home to ensure the savings from refinancing outweigh the costs,” said Dave Flanders, owner and founder at HomeVisors Collective. “It’s also important to check if there are any prepayment penalties on your current loan that could impact your decision.”
So, only a small decrease in your monthly mortgage payment might not be worth the hassle of refinancing “because you will have to pay closing costs on the refinance and the whole transaction might be a wash,” Reiner said.
“The main reason to refinance your mortgage is to take advantage of an interest rate that is lower than your current one,” Reiner explained. “Doing so can save you thousands of dollars over the life of the loan. People with a less stable mortgage, such as one with an adjustable rate, would also benefit from a refinance. And you might even be able to cut the length of your repayment by making a switch.”
Nally said that ideally, you would want your mortgage interest rate to drop by at least 0.5%.
Use Refinance Calculators To Help You Decide
Is refinancing your mortgage the best move for your financial health? There are easy ways to find out.
“You can find a number of mortgage refinance calculators online that will show you what you can expect to pay in closing costs and how much you could cut your monthly payment,” Reiner said. “Once you have determined that this is the right move for you, you can research which lender has the best offers. Most mortgage lenders also handle refinances.”
Think Twice About Refinancing If You Plan To Sell Soon
You might want to reconsider refinancing if you would like to sell your home soon. “Refinancing might not be worth it if you’re planning to sell your home soon or if you haven’t built enough equity yet,” Flanders said.
If Refinancing, Get Organized
Again, refinancing isn’t simple and you’ll need to be diligent and well organized.
“To refinance, you’ll need to gather financial documents, such as pay stubs, tax returns and your current mortgage information,” Flanders said. “After choosing a lender, they will appraise your home to assess its value and determine your new loan terms, taking into account your credit score, income and debt to income ratio.”
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This article originally appeared on GOBankingRates.com: How and When To Refinance a Mortgage Loan
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