When Does It Make Sense to Refinance Your Mortgage?

When interest rates drop, many people wonder if it’s time for mortgage refinancing. You may be able to secure a better mortgage rate than the one you currently have. However, it doesn’t always make sense to refinance. The upfront expense of paying for closing costs may nullify your savings over the first few years of the refinance. If you plan to sell your home during that period, a refinance may not be the right move.

What Is a Good Mortgage Rate?

A reasonable mortgage rate varies depending on the markets and how the Federal Reserve reacts to the economy. Most people think the lower the rate, the better. However, since the country has enjoyed historically low mortgage rates for some time, you can still lock in an excellent rate even if the number moves up and down.

Your credit score tells lenders whether you’re a default risk and determines the rate you pay. In general, the higher your credit score, the lower your interest rate.

Will the Savings Be Enough to Make Mortgage Refinancing Worthwhile?

If you’re considering refinancing and whether the savings will be worthwhile, there are several factors to consider, such as the following questions:

• How much are your closing costs? Calculate the expenses you’ll pay to refinance, which run about 3 to 5% of your total mortgage cost. They include everything from your first year of homeowners insurance to appraisal and loan origination fees.
• How long will you stay in your current home? If you plan to move within the next year or two, you may not pay on your refinance long enough to recoup the closing costs.
• How much does your house appraise for? Sometimes your home’s value has risen since you bought it. An increase in value can work to your advantage and eliminate mortgage insurance if you now have paid in at least 20% of your home’s value.

Luckily, you don’t have to play a guessing game with your finances. Use a mortgage calculator to see where your break-even point will be. Your break-even point will be how many months you pay into your mortgage before you’ve saved enough to equal your closing costs. For instance, if you drop your monthly payment by $200 with closing costs of $5,000, it will take 25 months to recoup the costs. If you move before that, then the refinance may not make financial sense.

Speak With a Financial Advisor Today

A financial advisor can help you figure out the best strategies for significant assets such as your home. Fort Pitt Capital Group offers many services for individuals, including consulting on purchasing or refinancing a house. Contact us today to discuss your financial future with one of our advisors.