Should You Refinance Your Mortgage?

Should I refinance my mortgage now? That’s a question I’ve heard a few times lately so I’ll address it here too in case it might be helpful. Deciding to refinance can be complicated and too much analysis can lead to paralysis, so let’s walk through some of the steps.

First you’ll want to find your note. This document lays out relevant details like the term of your mortgage, the interest rate, prepayment penalties, if any terms are adjustable, and when payments are due. Logging into your current loan provider’s website is good, but reviewing the note is best.

Once you have a handle on the relevant details, jump online to quickly see what’s available.

Bankrate.com is a great resource for this. As of yesterday, their site listed the national average for a 30-year fixed rate loan at 7.14%. The Wall Street Journal is often the go-to source for this type of data, but Bankrate is free and a little more user friendly.

In general, mortgage refinance rates are a tad higher than rates to buy a home, but both are twice as high as they were a year or two ago. So, in a sense the answer to the “should I refinance now” question is simple: no! You shouldn’t refinance if your current mortgage interest rate is less than 7%. And if you refinanced or bought a home within the past few years or so your rate is likely to be very low already. Actually, you could think of any long-term fixed rate below, say 4%, as being like an asset even though it’s technically a liability.

That part of the answer seems obvious, but what if you need to refinance? Maybe you have an adjustable loan that has been resetting higher as rates have risen and you’d prefer to lock it in. Or maybe you need extra cash and see your home’s equity as the answer.

Assuming one or both are true, here’s some thoughts on evaluating your options.

Expectations are all over the place in terms of whether rates rise from here, stay about the same, or go down. There are so many variables that, frankly, it’s simplest to just go with what we know today.

We know that rates are high compared to recent history but, according to government-sponsored-entity Freddie Mac, the 30-yr mortgage rate has averaged about 7.5% since the entity was created by Congress and tracking began in the early 1970’s. Rates hit their modern-era highs in 1981 with an average of nearly 17%. And I recall buying our first home in 1999 and borrowing at, coincidentally, the long-term average. Maybe that historical perspective makes today’s rates a little easier to swallow, but probably not by much.

Assuming you’re pushing ahead, an important next step is trying to guesstimate the appraisal value of your home. Sites like Zillow and Redfin are good starting places but focus on recent comparable sales in your area while looking at your “Zestimate”. I suggest being conservative.

Once you’ve looked at current rates and have done some market research on your house, you’ll want to talk with perhaps two different mortgage providers. You can start with your bank or credit union, or even your current lender. I like Rocket Mortgage because their website is straightforward, they’re fast, and they have access to a wide range of loan programs. Then reach out to a local independent mortgage broker for comparison because brokers sometimes have access to more loan programs than a larger lender can.

During these conversations you’re trying to get beyond the hypothetical and understand what you qualify for. This will primarily be based on your house’s value (again, be conservative), your current debt load, your income and, of course, the mortgage person will need to check your credit. Let them because that way you can talk specifics. Just don’t run around all over town having a variety of mortgage companies checking your credit. One or two are fine and won’t impact your credit score much, if at all. At this point you’ll know what your options are, and you’ll have a good idea about costs, both upfront and monthly.

Maybe your financial situation allows for rates and terms that are better than the national average, or it could be the opposite. Either way, pay close attention to the various fees involved with refinancing as some loans can be very expensive. The simplest approach is to evaluate the annual percentage rate, or APR, of a particular loan offer. The APR bakes in lender fees, points, various closing costs, and is usually higher than the interest rate because of this.

For example, Bankrate shows the lowest rate option for a 30yr fixed rate refinance at 5.5% and an APR of 5.74%. How is that possible when average rates are nearly 2% higher? Points. This lender requires you to pay about two percentage points of the loan value as an upfront fee to “buy down” the interest rate. Another lender offers a rate of 5.99% and an APR of 6.174%. Paying points buys this down too and the jump in APR includes additional closing costs of around $6,000. I’m generally against paying points unless you can easily afford it and you plan to own the home for a long time (at least to the breakeven point that your mortgage person can help calculate). So try to look for programs that don’t require points, or maybe a fraction of a point would be okay; just try to keep a lid on costs.

I suggest being skeptical about the lowest APRs because they sometimes aren’t even possible for your situation. The overpromised/underdelivered feeling can be a real pain when it comes to refinancing. In my experience it most often occurs when using overly optimistic assumptions about your home’s appraised value and working with an indulgent (or willfully naive) broker. Again, be conservative and try to understand what value range you need for a given loan program. A good mortgage broker should help here, especially since they often need the loan to close in order to get paid.

Ultimately, deciding to refinance is a tough decision that’s often made simpler by your circumstances. But once you’ve decided, carefully evaluate which loan program is right for you and your family. Look at APRs while reminding yourself that the lowest may not be the best. Think about complexity. I’ve left out discussion of adjustable mortgages and other options because they’re usually not a good idea. Keep your refinance process and all your debts, for that matter, as straightforward and inexpensive as possible.

Have questions? Ask us. We can help.