By Sabrina Karl
With mortgage rates near their all-time lows, many homeowners are refinancing to lower their payments, shorten their mortgage, or convert some home equity into cash. Is refinancing right for you, too?
The answer depends largely on the mortgage you’re in. If you’re paying 4% or more, refinancing now is almost certainly a good economic move, as average rates are currently in the low to mid 3% range. But even if you have a mid 3% rate right now, refinancing can possibly still pay off, especially if you move to a shorter-term loan.
Another important consideration in deciding if now is a good time to refinance is the state of your credit score. The higher your score, the better rate offers you’ll receive. So consider if you can boost your score before applying to refinance, or if you can hold off on anything that would ding your credit (like applying for a new loan or credit card).
Of course, it’s important to confirm that your current mortgage allows for prepayment. Most do, but some involve a penalty for paying early. A penalty isn’t necessarily a deal breaker, but you’ll need to figure that cost into your calculations to decide if refinancing will make sense for you.
Planning to live in the house for a while, and having at least 20% equity built up are also key. You won’t want to pay for a refinance only to move in a couple years. And going below 20% equity would trigger costly private mortgage insurance.
Lastly, do you have time to do the research? Doing your homework not only on the best rates, but also on the refinance fees different lenders are quoting, is a bit of a project. You’ll need time to comparison shop and run the numbers to find your best loan.