Interest rates recently hit all-time lows as the Federal Reserve made cuts to mitigate the financial impacts of COVID-19. If you’re a homeowner with a monthly mortgage payment, you might be wondering if now is a good time to refinance. While a lower interest rate may yield a more affordable monthly payment, there are other factors to consider. Here are seven questions to ask yourself before making the decision to refinance:
Will you qualify for a better rate? The best interest rates are reserved for borrowers with optimal credit. If you are one of the millions of Americans who has filed for unemployment benefits during the COVID-19 outbreak, your employment status is not included in your credit report. However, your credit score can be affected by many factors such as if you suddenly carry more credit card debt, have missed or made late payments or have applied for new credit during this challenging time.
What will your new loan cost? A lower interest rate and lower monthly payment do not always add up to savings in the long run. Your loan will have closing costs and fees. Factor in prepayment penalties, if applicable. Costs often vary by lender, so it may be a good idea to shop around for the best rate. Talk to your financial advisor or reference one of the many online refinance calculators to help you determine the breakeven period, or how long it will take before you realize savings with a new loan.
Do you plan to move in the next five years? The value of refinancing can be diminished when you exit a new loan before you’ve had the chance to recoup closing costs and fees.
Will your new loan eliminate lender insurance? If your home’s market value has increased enough to grow your equity, refinancing with a conventional mortgage can potentially remove private mortgage insurance (PMI) sooner. Federal Housing Administration (FHA) loans require mortgage insurance regardless of equity.
Are you trying to get out of an adjustable-rate mortgage (ARM)? Switching from an ARM to a fixed-rate mortgage can mean more predictable monthly payments.
Are you seeking a new term length? A shorter-term loan may offer better rates, but it can mean a higher monthly payment. If your income is threatened by the current situation, this may not be a good time to increase your monthly obligations. On the flip side, you may want lower monthly payments that come with a longer-term loan. Although it’s important to note you will have to make those payments for many more years, incurring greater expense and reducing your ability to save.
Can you afford your current home? If you’re having trouble making your loan payments, refinancing is not the only way to find relief. As an alternative to refinancing a house you’re struggling to afford, you might explore downsizing to a property with a mortgage your budget can handle.
These uncertain times reinforce the importance of financial planning. Talk to your financial advisor for guidance on how to build equity in your financial future.
Jeff Jolly, CFP, is a Private Wealth Advisor and Sr. Vice President with Ameriprise Financial Services, Inc. in North Haven. He specializes in fee-based financial planning and asset management strategies and has been in practice for 15 years. To contact him, call 203-407-8188 ext. 330, or visit his office at 250 State St. Unit E1.