Most people think that when you take out a mortgage with a fixed interest rate, you can expect to be locked into the same monthly payment for the life of the loan — or even the rest of your life. But that’s not necessarily the case. Many homeowners can benefit by refinancing their mortgage at a lower interest rate.
Before you can decide whether it’s worth it to refinance, get a handle on the numbers involved and consider the following questions:
- How many more years do you have on your current loan, and what’s your current interest rate?
- How much do you still owe?
- Will you be borrowing the same amount, or are you hoping to cash out some equity?
Answers in hand, now you’re ready to turn your attention to the new loan you’re hoping to get.
What kind of interest rate can you expect?
Some say it’s not worth it to refinance unless you’re knocking off an entire percentage point (e.g., going from a 5% interest rate to 4%), but that rule can be misleading.
If you’re planning on staying in the home for several more years, even a small reduction in your interest rate can make a big difference. If you’re a little hazy on the math, Trulia’s refinance calculator can help demystify things.
Don’t forget about closing costs
That’s right. Closing costs aren’t just an issue when you buy a house. You pay closing costs again when you refinance, although they’ll be lower this time.
Trulia’s mortgage center will help give you an idea of what kind of loans might be right for you. You may also want to go back to the bank that holds your current mortgage. Sometimes, in a bid to keep your business, your current lender might be willing to give you a good deal or introduce you to new products available.
15 years versus 30 years
Keep in mind that lower interest rates may be available if you get a 15-year loan instead of a 30-year one. But your payments are likely to be much higher with a 15-year loan, so many buyers stick with a traditional 30-year loan term.
Think carefully about whether you want to reset that 30-year loan clock, however. Some countries don’t allow older borrowers to take out mortgages that will still be in repayment mode when the borrower reaches retirement age, but the United States has no such restriction.
Some borrowers may choose to refinance with a 30-year loan so their monthly payments will be as low as possible, but plan to pay it off early. It’s up to you to think ahead about what your circumstances are likely to be 20, 25, or 30 years into the new loan.
Fixed interest rate or ARM?
Another consideration is whether you want a fixed interest rate. Adjustable-rate mortgages, or ARMs, often have a lower interest rate that’s fixed for a specific period of time, say one, three, or five years.
If you’re reasonably sure you’ll be selling the house within that period, it might be worth it to go with an ARM. But interest rates are still historically low, so many experts recommend locking in an interest rate now.
Even if you don’t plan to be in the house for very long, life is unpredictable. You may find yourself still living in the house when the interest rates adjust. Many homeowners have found themselves in hot water when they were unable to refinance after rates fluctuated and left with a skyrocketing monthly payment.
Once you’ve thought through each of the implications of refinancing and made your decision, then you’re ready to request a quote from a mortgage lender.