Since 1980, mortgage rates have been in a long-term downward trend. If you have high interest-rate debt, or a mortgage rate over 5%, it is likely that it would be beneficial to look into refinancing your home.
Rates are so low for 30-year mortgages (around 3.5%), that many people can change their mortgage to an affordable 20-year or 15-year fixed mortgage, with even lower rates. Fixed rates for a 15-year mortgage can be as low as 2.75%; a 10-year rate is about the same as the 15-year rate.
Anytime you refinance a mortgage, there are two important considerations:
- How long do you expect to remain in this home? First, never take a mortgage with a variable rate for a term less than you expect to be living in your home. If rates increase, you could be financially forced to sell your home if rates increase. Second, if you expect to move within 3 years, then it may not be enough time to cover the expense of refinancing. The average closing cost to refinance is $1,350. Divide your estimated closing costs into your monthly savings (old mortgage payment – new mortgage payment). The result tells you how many months it will take to recover your closing costs. You need to expect to remain in the home as least as long as it takes to recover those closing costs.
- When someone refinances their mortgage, it is normal to extend the term of their mortgage. For example, if their old mortgage had 19 years left and they refinance it back out to 30 years, then they’ve added 11 more years of debt payments. Instead, any monthly payment savings MUST be used to pay down the principal balance so that the new 30-year mortgage will be also paid off in 19 years, or less. But you need to map it out to make certain that you are NOT extended the term of your mortgage when you refinance.
Since mortgage rates are so low, many people are refinancing but they are not evaluating these two important criteria. I predict that they will mistakenly take the payment savings to increase their lifestyle spending, making them financially worse off. Please do not join them and evaluate shortening your mortgage term instead of lengthening it when you refinance.