To Refinance or Not to Refinance?

Whenever mortgage rates start drifting downward, homeowners’ thoughts often turn to refinancing. Now is no exception. But is it a good idea for your situation?

Ed Currie, Residential Loan Officer for Associated Bank, suggests that you take a few points into consideration when deciding whether to jump on the refinancing ride:

• Take a look at your current rate. If you feel like it’s on the higher side, you might want to explore a better offer.
• Do the math. How much will that lower rate save you on your monthly payment? Now, how much will switching to that rate cost you in fees? Once you divide those two numbers into each other, you’ll be able to figure out how many months it may take you to recoup that cost. If your plans are to stay in that home for a few years longer than the time it takes to recoup, then refinancing is definitely worth considering.

As mentioned above, there’s more to it than a good rate. Closing costs can make a big difference. For example, a 3.75% rate on a 30-year fixed-rate mortgage might be a zero point rate and cost you $2,000. Or you might find what you think is a phenomenal 3% rate, only to find that it might closing costs could approach $10,000. You could also get a slightly higher 4% rate, but one that comes with no closing costs.

Currie suggests that you try to narrow your search to one factor or the other. “You might want to look at what is the rate, what is the cost and then try to compare the two. For some people, when they shop for rates, what they’ll do is simply contact the different lenders they’re considering and say, ‘How much will it cost at this rate?’ and eliminate one of the variables. And if they can get a 3.75%, that should put them in a position to be able to compare the different lenders on who has the better offer.”

Another factor to keep in mind is timing. With the current drop in rates, some financial institutions are struggling to keep up with volume. That’s why, once you’ve found that mix of rate and costs that works for you, it’s important to fill out and file your paperwork as soon as possible to avoid any possible delays in closing—and missing out on your lock on that offer.

And what if rates go lower? Gauging the market is nearly impossible, so try to get what makes sense for you now. According to Currie, pre-payment penalties are virtually non-existent at present, so you won’t be locked into your mortgage for years. You can theoretically refinance a month later, but with the rate volatility, any move should still require careful consideration.