With mortgage loan interest rates hovering at record lows,* you may be tempted to refinance your mortgage, especially if you’re paying more than the going rate. Refinancing to a lower rate could free up more money in your monthly budget and save you thousands of dollars in interest charges over the life of the loan. But before you hop on the refi bandwagon, consider if refinancing is the right choice for you.
The Hows and Whys of Refinancing
Refinancing a mortgage simply means paying off one loan and replacing it with another.
A refinance can make good financial sense if:
- Your existing loan has a higher interest rate than what is currently being offered. An old rule of thumb suggests a refinance may be worthwhile if the new rate is at least two percentage points lower than the old rate. However, the interest rate is just one factor, since there are other costs associated with refinancing.
- You currently have an adjustable-rate loan and want to lock in a low fixed rate to avoid the possibility of future rate increases.
- You want to pay off your loan faster by changing the terms, say, from 30 years to 15.
When doesn’t a refinance make sense?
- If, after comparing rates and upfront costs, it is unlikely to save you money.
- If you’ve already paid off a good chunk of your mortgage, in which case the upfront costs may exceed any potential savings.
- If you plan to move within a couple of years, making it unlikely you’ll recoup the refinancing closing costs.
The Cost of Refinancing
Once you compare rates, you need to look at the costs of refinancing. These may include:
- Application fees
- Appraisal fees
- Attorney’s fees
- Title search and insurance
- Any potential payoff penalties from your current lender
Always check into closing costs, which can range from 2% to 5% of the loan amount. For example, refinancing a $100,000 loan may cost anywhere from $2,000 to $5,000, depending on the lender. If closing costs exceed the savings you would expect from refinancing, you may want to reconsider. The DCU refinancing calculator can help you determine potential savings. Use the DCU Personalized Quote Tool to estimate your rate and closing fees based on your individual loan details and current rates.
Another potential upfront cost: points. Points typically equal 1 percent of the loan amount and typically will increase closing costs, but lower the interest rate.
Finally, it may be possible to fold the closing costs into the loan amount, but in that case, it will affect the overall cost of the loan. You’ll either increase the total amount borrowed or, in some cases, pay a slightly higher interest rate.
Preparing for a Loan Application
So, you’ve done your homework and have decided to go ahead with a refi! Along with your current mortgage details, here is some additional information you may want to have prepared before submitting your mortgage application:
- Proof of income, such as W2s, 1099s, and/or tax returns
- An estimate of your current credit score
- A list of assets and outstanding debt
In many cases, a refinance could mean more money in your pocket every month and over the life of your loan. Just be sure to understand the real costs of refinancing. DCU members can compare our competitive mortgage refinance rates here and apply for a mortgage online.
Please note, membership is required to accept a DCU Mortgage. Visit our membership eligibility page for more details.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
*Source: Freddie Mac, Forecast, Jan. 14, 2021, freddiemac.com.
