Mortgage rates are hitting record lows due to the current economic slump, and it doesn’t show any signs of slowing down. The average 30-year fixed rate plunged to its lowest recorded level at 3% for the first time in decades. Meanwhile, the 15-year fixed-rate sat at a low 2.47%. It makes sense that you would want to refinance your mortgage to take advantage of this moment in time, but should you?
Sometimes, even when rates are low, refinancing might not necessarily be beneficial. It mostly depends on whether you’re guaranteed to get the best mortgage rates, especially compared to the one you currently have. Here are some things to take into consideration before you decide to take the plunge.
What does it mean to refinance your mortgage?
Refinancing a mortgage involves replacing an existing debt with a new one that provides different, usually better terms to pay off the outstanding debt of the old loan.
What benefits are involved with refinancing?
There are plenty of benefits associated with refinancing your mortgage. The following are just some of the most common benefits that you can take advantage of:
- Lowering your interest rate
- Eliminating private mortgage insurance (PMI)
- Securing cash to fund remodeling projects or pay off other debts
- Shortening the term of your mortgage
- Reducing your monthly payment obligations
- Consolidating your debts
- Leveraging equity in your property to receive a cash-out refinance
- Modifying your loan program from an adjustable-rate to a fixed-rate mortgage
What are the risks associated with refinancing?
Despite all the benefits mentioned above, there are still some risks involved with the process. While these risks shouldn’t completely discourage you from going forward with refinancing, it should make you think twice about your decision. Here are just some liabilities that you could encounter:
- Lower interest rates sometimes coming at the price of longer loan terms
- High closing costs involved with obtaining a new loan
- Loss of protection from legal ramifications of not being able to pay back the loan
- Difficulty moving out of the current property
When should you refinance your mortgage?
The decision to refinance your mortgage all boils down to why you want to go through with the process and if the benefits far outweigh the risks involved.
One good reason is if you want to shorten your loan’s term. Depending on your circumstances, you could benefit from having a shorter loan term with the same monthly payment fees or a higher monthly payment obligation. If you have a low debt-to-income ratio and you’re able to cover the cost of potentially higher monthly payments, you could be on the right track.
Another recommended incentive is if you want to shift to a fixed-rate mortgage from an adjustable rate. Fixed-rate mortgages charge a rate of interest that’s locked in for the entire duration of the loan. Most people go for flexible rates because they often start at a relatively low one, but the steady rate increases eventually make it much higher than that of a fixed-rate mortgage. In this situation, you’ll benefit from shifting away from an adjustable rate.
Just because the conditions are favorable for refinancing doesn’t always necessarily mean it’ll benefit you. It’s essential to weigh your options, calculate the risks, and see what’s right for you.