Is Now the Right Time to Refinance?

Interest rates have finally started to slide and could fall further in the near future. This moment in time could be a great opportunity to save some money by refinancing. The decision depends on various factors like your current mortgage rate, loan terms, closing costs and your financial goals. Here’s a guide to help you determine if now is the right time to make a move.

Why Refinance?

These are some of the main reasons you might refinance, and you can have more than one! Having a clear goal is the first step in determining whether a refinance makes sense in your unique situation.

Save Money

Refinancing can be a smart way to save on your monthly payments and reduce the total interest you pay over the life of your loan. If you’re currently paying a higher interest rate, refinancing to a lower rate could put more money back in your pocket each month. The money you save could help you pay for groceries, go towards retirement or help you fund your next vacation — it’s up to you!

Debt Consolidation

You may have a good rate on your mortgage but you have a much higher rate on other loans like a HELOC or credit card. Refinancing could allow you to consolidate all these debts into a single loan, saving you a substantial amount of money over the life of the loan.

Patrick Clayton, Horizon’s director of home lending, also offers this tip: “When you’re paying off a car loan or a credit card, that interest is not tax deductible. But if you combine those loans into your mortgage, the interest could now be tax deductible. So that might be another financial benefit for folks.”

Cash Out

Need some extra cash for home improvements, a big purchase or to pay off high-interest debt? With a cash-out refinance you can tap into your home’s equity and get the funds you need. Plus, you may get a better interest rate in the process.

Change Your Loan Terms

Refinancing can let you adjust your loan terms to better match your financial goals. For instance, you may want to switch from a 30-year mortgage to a 15-year to pay it off faster. Or you could switch from a 15-year term to a 30-year to possibly get a lower monthly payment.

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Refinance Calculator

Key Factors

When it comes to refinancing, people are often focused on rates. But they aren’t the only important factor! Make sure to consider each of these details before jumping in.

Rates

The biggest factor affecting most people’s decision to refinance is current interest rates. If you can refinance to a rate that’s lower than your current mortgage interest rate, it could save you money over the life of your loan.

So how much do rates need to fall for refinancing to be worth it? Clayton weighs in: “There’s a general rule. Usually if current rates are one percent lower than what you have, that’s a very good starting point.” So if your current mortgage has a seven point five percent interest rate, refinancing to a six point five percent rate or lower would likely be worth the time and money.

You can also do a quick analysis of how much you could save using Horizon’s easy refinance calculator. There’s no sign-up or email address required and it’s completely free!

Loan Terms

Most mortgages have a 30-year or 15-year term. Mortgages with a 30-year term usually have a lower monthly payment than 15-year mortgages. However, you’ll likely pay more money in interest over the life of the loan.

You’ll have to think about your goals and financial strategy. For some, it’s more important to pay off their home quickly than to have the lowest payment. If you want to pay off your home faster, falling interest rates may provide an opportunity to get a 15-year mortgage you can afford.

Going the other direction, transitioning from a 15-year term to a 30-year term could lower your monthly payments and make some extra space in your budget. In the end it all comes down to your personal needs and desires.

Closing Costs

Keep a close eye on closing costs when you refinance. These include appraisal fees, loan origination fees and other charges. To estimate your closing costs, Clayton suggests starting with 1% of the loan amount and then adding some money for the other fees.

Closing costs aren’t necessarily covered by your loan amount, so you’ll need some extra cash on hand to cover them. Make sure that the savings from refinancing outweigh these costs.

Once you’ve saved the amount of money by refinancing that you spent in closing costs, you’ve reached your break-even point. You can estimate your break-even point by using our refinance calculator, or speak with a mortgage loan originator to get a more accurate assessment. Knowing your break-even point will help you assess whether a refinance will actually save you money or not.

Credit Score

Your credit score plays a big role in determining the interest rate you’ll get. A higher credit score usually means a lower rate, which translates to more savings. If your score has improved significantly since you got your current mortgage, you may qualify for a better interest rate now than you did before. This combined with falling rates could save you a lot of money.

If your credit score isn’t where you’d like it to be, you may need to improve it to make refinancing worth it.

Moving Soon?

Take into account how long you plan to be in your current home. If you’re planning to sell your home in the near future, refinancing might not be worth the cost or effort. It usually takes a few years to reach your break-even point after refinancing. If you’re not sticking around you may not reap the benefits.

Clayton offers this hypothetical example: “If I have a seven percent interest rate and current rates are at six percent, but I plan to sell in three years and it will take longer than that to recover my refinancing costs, it might not be in my best interest to refinance. The money spent on refinancing may not outweigh the potential savings.”

Ready to Refinance?

If you’ve weighed these factors and think refinancing might be right for you, we’d love to help. We offer competitive rates and personalized service to guide you through the refinancing process. Our team is here to answer your questions and make sure you get the best deal for your needs.

Call us at 800.852.5316 to start a conversation, or skip ahead and apply online today. We’re excited to help you discover if a refinance is right for you!