Calculating a Mortgage Refinance

Is Now the Best Time to Refinance Your Home?

July 9, 2020

Darren Melstad By Darren Melstad
Mortgage Banker

“Now is a great time to refinance your mortgage!”

If you own a home, you might be hearing this often from neighbors, co-workers, family and friends. But is it a great time, really? The answer depends, because every homeowner’s situation is unique. In this article, we’ll explore the things you should consider to find out if refinancing your mortgage is right for you.

Shortcut: Just use our mortgage refinancing calculator »

What does refinancing your mortgage mean?

Refinancing your mortgage basically means that you’re swapping out your old home loan for a new one. There are two main types of mortgage refinances:

  • Rate-and-term refinancing: This means changing your loan to get a lower interest rate, shorter term or smaller monthly payments on your loan.
  • Cash-out refinancing: This means getting a lump sum of cash from the Bank to pay for something else. In exchange, your mortgage will become more expensive.

When it's a good idea to refinance your home:

There are typically five reasons why you would want to refinance your mortgage:  

» To reduce your monthly payment

» To get a lower interest rate

» To pay off your loan faster

» To receive some needed cash

» To switch to a different Bank or mortgage lender

If you’re thinking of refinancing your mortgage for any of these reasons, the good news is mortgage rates have plummeted to near a 50-year low. This is a direct result of the coronavirus pandemic and the Federal Reserve’s decision to keep interest rates historically low in an effort to protect the economy from the virus.

In fact, rates are currently so low that refinancing your home loan right now could save you tens of thousands of dollars in the future.

Refinance Today? 5 Questions to Ask Yourself:

This all sounds wonderful, but when it comes time to refinancing, it’s important you do your research first before making such a huge decision. Here are some questions to consider:

1) How much does it cost to refinance my mortgage?

Just because you qualify for a good rate doesn’t mean it will save you money in the long run. There are closing fees associated with refinancing your house, typically ranging from 2% to 6% of your loan amount. However, lenders also have the ability to do "no cost" or "no origination fee" loans, usually offset by higher interest rates. At Security National Bank, we customize our offers and make the appropriate recommendations for each unique situation.

2) What is my breakeven point?

When it comes to refinancing, your breakeven point is the exact moment that your total savings from the lower rate will match the amount you spent on closing fees.

For example, let’s say your refinance will lower your payments by $50 per month, but your refinancing fees total $5,000. It would take you 100 months to break even. As long as you plan on having your house for at least 100 months — or 8 1/3 years — then refinancing makes sense. However, if you’re planning on selling in the next couple of years, a refinance probably isn’t a good idea.

 

Mortgage Refinance Calculator

To calculate your breakeven point, or to see if refinancing makes sense for you, use our mortgage refinance calculator below:

 

3) Do I have good credit?

Unfortunately, the lower your credit score, the more likely it is that your refinancing rate will be higher. If your credit score isn’t as high as you’d like, we have some suggestions on how to raise your credit score — like checking your credit report regularly, paying your bills on time, keeping your credit card debt low and sticking to a budget.

It’s important that you spend time reviewing your credit report for free on a regular basis and making sure there aren’t any errors. Believe it or not, mistakes on your credit report are quite common. Not only is catching them a great way to increase your credit score, it can help protect you from fraud.

4) Do I plan to take out a large sum of money?

While refinancing can be great way to get that cash you need for home improvements, paying off debt, or investing in real estate or retirement funds; it’s important you don’t take out so much money that you’re left vulnerable. If your home’s value falls, you run the risk of “being underwater” — which means you owe more money to the bank than the property is worth. Also, if you refinance in a way that leaves you with a high monthly mortgage payment, you could find yourself in a tricky situation should you lose your income and your finances suddenly become tight.

5) Do I trust my mortgage lender?

Beware that there are some predatory lenders out there. It’s important that you find an Equal Housing Lender with experienced mortgage experts who you know and trust — that way, you get the best service and rates available.

If refinancing your mortgage makes sense for you, Security National Bank is here to help. Contact us to learn more about your options and rates, and see how our lenders can help you!

 

About the Author

Darren Melstad

Darren Melstad is a Mortgage Loan Originator with Security National Bank of South Dakota. A lifelong South Dakota native (he grew up just down the road in Vermillion), Darren helps customers with residential home loans and business development in the Sioux Falls area.