A popular question right now is, Should I Refinance? With interest rates hitting historic lows at the end of 2020 and continuing into Quarter 1 of 2021, you may be wondering if you should take advantage of the interest rates. There are two options for you: buy a new house or refinance. If you are happy with the size and location of your home, moving might not even be on the radar. So you might be asking yourself, should we refinance our current mortgage to lower our house payment.
We have a quick and easy way to figure out if refinancing will actually be beneficial for you and if you can recoup the cost.
First, let’s say you bought your house for $200,000 in 2013. It is an FHA loan at 4.5% and at the time of closing, you put down 3.5%, so you pay mortgage insurance. You’ve managed to pay your mortgage down to $160,000. Now, you’ve been pre-approved for a 3% refi and if after the appraisal you have 20% equity in your home, you’ll be able to roll your closing cost into the loan and not have to pay mortgage insurance. The difference in your mortgage payment is going to be about $250 lower than what you have now.
So here’s the formula you can use to decide if refinancing is a smart choice right now:
Closing Cost / Difference in Monthly Payment = # Months to Recoup Refinance Cost
$5,000 / $250 = 20 Months
With the above scenario, you will need to stay in your home almost 2 years before you’ll recoup the costs incurred with refinancing. If you see yourself staying in your house at least this long then it might be beneficial to stay where you are and refinance!
Rates are expected to start increasing by Quarter 4 per the Mortgage Bankers Association.
The Mortgage Bankers Association (MBA) says it believes the average rate for a 30-year mortgage will gradually increase to 3.2% by the end of 2021. Looking even further down the road, the MBA has 2022 rates peaking at 3.6%.
One thing to look at: since the interest rates are so low right now, you can afford more of a house than you could in 2019. So, now might be the time to look at moving, especially as we spend more time at home, you might could use an extra living area, bigger kitchen or an office!