Deciding whether or not to refinance your mortgage is complicated in the best of times. But with the unknown looming in 2017, the question is even messier than usual.
Many experts and economists are predicting rising interest rates this year. Kiplinger, for instance, predicts that the average 30-year fixed-rate mortgage will rise to 4.6% this year. That's still a fairly low rate compared with other points in history. But rising rates may have homeowners like you wondering if they should refinance sooner rather than later.
If you're currently paying higher-than-average interest on your mortgage, you may want to consider refinancing this year before the interest rates rise. Of course, you'll also need to factor in your credit since that'll determine the rate you're offered when you go to re-fi (more on this in a minute). You can view two of your credit scores for free on Credit.com. They're updated every two weeks, and checking your scores won't harm them in any way.
Here are some questions to ask to determine whether or not to refinance your mortgage this year:
1. What Interest Rate Will I Qualify For?
It's important to figure out what interest rate you're likely to qualify for. One way to do this is to check out a mortgage rate calculator, which will take some basic information and give you a likely APR for your mortgage.
The only way to find out for sure how much a mortgage will cost you, though, is to shop around. Check out different online mortgage lenders, as well as traditional bricks-and-mortar options. Remember, if you apply to refinance your mortgage with several lenders within a few days' time, it'll only count as one hard inquiry on your credit report.
What should you do if your credit score is on the low side? Consider taking some time to boost your credit score, especially if you can do it relatively quickly by paying down credit card debt. However, you'll need to weigh the benefit of having a better credit score when you refinance against the possibility that interest rates will balloon before you can refinance. (Have bad credit? Here's what to know if you're thinking about refinancing anyway.)
2. How Much Will Refinancing Cost?
As with buying a home, there are usually closing costs involved when you refinance. Some lenders offer no closing cost refinances, which can save you a bundle up front. However, loans without closing costs may charge a higher interest rate. And even so-called "no closing cost" refinances may have some fees due at closing.
Generally, though, closing costs on a refinance will be similar to closing costs when buying a home. You'll need to pay credit fees, appraisal fees, escrow and title fees, and other fees imposed by your lender. Overall, you can estimate closing costs to be about 1.5% of the total loan principal.
If you've got enough equity in your home, you may be able to roll closing costs into the overall principal amount. But you'll still wind up paying these fees one way or another.
3. When Will I Break Even?
Calculating when you'll break even is the essential piece to deciding whether or not you'll refinance. Since you have to either pay up front or roll refinancing costs into your loan, you need to know how long it'll take to get that money back.
To calculate your break-even point, you need to first find out how much money per month the refinance will save you. Then, calculate how much it will cost. Divide the total cost by the savings per month, and you'll see how many months it will take to break even.
For example, say you expect to pay $3,000 to refinance your $200,000 mortgage. You'll save $175 per month when you refinance. So your break-even point is about 17 months. Once you've paid on the refinanced mortgage for 18 months, you'll be saving money overall.
4. How Long Do I Plan to Stay in My Home?
Generally, refinancing your home is a winning proposition any time you stay in your home longer than your break-even period. In the above example, you'll come out on top if you own your home for at least 18 months after you refinance.
Of course, the longer you own the home after your break-even month, the more money you'll save because of your refinance.
If you're not reasonably sure you'll own your home through your break-even month, refinancing won't be worth your while. But if you think you'll stay in your home, refinancing could save you a lot of money over the long haul.