You may have heard people talking about refinancing their home lately. This is because interest rates just decreased again and are expected to stay low for the remainder of the year. A refinance of a loan is simply replacing your current mortgage with a new mortgage with different terms. The terms of a mortgage are usually interest rate, term of loan (number of years) and PMI (private mortgage insurance).
When rates drop you will hear a lot of talk about refinancing because it is a great way to reduce your monthly payment on your mortgage. The biggest cost on your mortgage is your interest charge. Reducing your interest rate can have a drastic impact on your monthly cost. Depending on your situation, you could also eliminate the need for PMI which is a large cost to borrowers that put down less than 20% of the purchase price. If you’ve added additional principle to your loan over time this will further increase your potential savings.
What Drives Interest Rates?
The Federal Reserves uses monetary policy to indirectly change interest rates. The Fed can tighten or loosen the amount of money in the system through buying (loosening) or selling (tightening) bonds. This is an over simplified explanation but one of the most common tools the Federal Reserve uses. As the Fed makes these changes there is either more money in the system or less. If there is more money in the system rates typically go down.
Reasons the Fed Tightens or Loosens Rates
There are many reasons that that fed may tighten or loosen rates. Below are a few reasons they change policy:
Factors that Drive Rates UP
Non Farm Payrolls are higher than expected
Unemployment rate goes down
Better than expected economic data in general
Factors that Drive Rates Down
Jobs data stagnates or is in decline
Manufacturing is stagnant or slowing
Housing is weaker than expected
Factors that Drive Rates Up
Higher consumer price index
Higher wholesale prices
Hourly earnings increase
Factors that Drive Rates Down
Lower consumer prices
Lower wholesale prices
Hourly earnings decrease
Why Refinance Now?
There are a lot of reasons to consider refinancing now. There are however some reasons to consider not refinancing. Talk with your lender to see if a refinance makes sense for you.
Rates are currently near an all time low. If you are going to be in your home for a long time now is a great time to lock in a great long term rate.
Refinancing can save you anywhere from a few dollars to a few hundred dollars per month depending on how much princinple you’ve paid off and your current rate on your loan.
Refinancing can eliminate PMI depending on how much principle you’ve paid off and how much your home has increased in value. This can have a enormous impact on your monthly mortgage payment.
Refinancing will put you back at the beginning of the interest curve. If you are making the base mortgage payment it takes about 7 years to start paying down the debt on your loan (this does not account for equity built through appreciation). If you refinance you are starting the 30 year mortgage from scratch and therefore the interest curve.
Refinancing extends the term of your loan (unless you choose a shorter term). Therefore, if you had planned on matching your loan term to your retirement or another life event it will extend this time.
Most lenders can refinance without closing costs but there may be costs associated with refinancing. You need to make sure that the math works in your favor depending on how long you plan on staying in your home.