Interest rates are at record lows. Here’s how to know if refinancing is the best option for you when you’re close to retirement. (iStock)
As the coronavirus pandemic continues to test the US economy, the Federal Reserve has reduced mortgage interest rates to record lows to encourage as many borrowers as possible to invest in the real estate market. With that in mind, depending on the details of your financial situation, it could be a good time to take your retirement plan one step further and access these low interest rates by refinancing the mortgage (which can lead to a lower rate and payment))
Before refinancing your current loan, be sure to use an online marketplace like Credible to compare multiple lenders and view current refinance rates.
That said, refinancing may not be the best option for everyone. If you are retiring or preparing to do so in the near future, you may need to take an overview of the loan and reflect on your loan options to decide if refinancing is right for you. Read below to learn how to determine if now is the time to refinance your home.
Factors to consider before refinancing
Leaving low interest rates aside, there are four main ways that choosing to refinance your mortgage will affect your finances. We list them below so you can weigh the pros and cons before making the best decision for you.
1. The initial cost
The first thing to consider is the initial cost. Essentially, when you do a mortgage refinance, you are taking out a new loan to pay and replace the old one. However, most banks and lenders charge fees to close the new loan, similar to how new mortgage borrowers pay closing costs when they close a home.
If you are thinking about getting a new mortgage loan to access the low mortgage refinance rates available on the market right now, it is important to weigh whether you can pay these costs up front and whether the cost nullifies the amount you save on your mortgage.
In making your decision, your best bet is to ask your lender for a loan estimate, which will give you a breakdown of the costs you can expect to pay for the new loan. Credible can introduce you to multiple mortgage refinance lenders at once, so you can compare deals and find out what kinds of rates you qualify for instantly.
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2. Your balance point
In the event that you cannot pay your closing costs in advance, most banks will allow you to include those fees in your new loan. At that point, you would need to find your break-even point, or the point where you will have paid your closing costs and begin to see real savings by refinancing your loan. Then, you’ll need to compare it to your home plan.
For example, if it takes you five years to pay your closing costs, but you plan to sell the house in a similar period of time, it may not be worth refinancing, despite the low rates. However, if you plan to stay in the home for an extended period of time, having access to record low refi rates could be worth it in the long run.
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3. The impact on your monthly budget
Then think about the impact on your monthly budget. Putting interest rates aside, another way to lower your mortgage payment during a refinance is to stretch the amount you currently owe on your home over a longer loan term. That said, if you do decide to go this route, you’ll need to determine if you can still pay your mortgage payment when you’re ready to stop working.
You can visit Credible to compare mortgage lenders and save money with a lower monthly payment.
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Alternatively, the other route that people take when mortgage refinance rates are low is that they choose a shorter loan term to pay off their mortgage earlier. Of course, doing so often leads to a higher monthly mortgage payment, so you’ll need to make sure you have room for that in your budget.
You can use a Online mortgage refinance calculator to estimate your new monthly costs.
4. Paying your mortgage versus building savings
The last factor to consider, especially if you are considering using record interest rates to pay off your loan faster, is whether it is better to pay your mortgage or accumulate savings. This is usually a decision for you to make with your financial advisor and will largely depend on how long you intend to stay home.
The bottom line
In the end, while low mortgage refining rates are available right now, refinancing may not be the best decision for everyone. Before deciding which option is best for you, it is important to have an idea of what rates are available to you and how refinancing will affect your finances.
If you’re still unsure, you can visit an online marketplace like Credible to contact experienced loan officers and get answers to your mortgage questions.
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