Since interest rates have been dropping, you may be wondering if it's a good time to refinance your mortgage. The old rule of thumb was when interest rates went down by a point, it was a good time to refinance.
"The rules have changed," said Joshua Rakiey, Hanscom Federal Credit Union's assistant vice president of mortgage origination. "There are some new guidelines you should pay attention to if you're looking to do a rate-and-term refinance on your mortgage — that is, if you want to reduce your interest rate and stay roughly at the same term."
- Interest rates are a half a point lower than your current rate. "It doesn't have to go down by a full point, especially when the other two rules apply. Just a half a point can be worth it."
- The refinance adds five years or less to the length of your loan. "If it reduces the number of years on your loan, even better," said Rakiey.
- Refinancing allows you to recover your closing costs in under five years. "Much less than five would be even better," he added.
Hanscom FCU has a mortgage refinance calculator that will show you how much refinancing your mortgage can save you. It will also calculate the number of months it'll take to break even on closing costs with your new reduced monthly payment.
There may be other reasons why you want to refinance where these new rules may not be applicable. For example, you might want to refinance if your credit has improved significantly, which would give you a lower interest rate on a refinance, or you want to do a cash-out refinance, which would replace your current home loan with another for more than you owe on your home. (The difference is given to you; homeowners may use it on home improvements, college costs, or consolidating higher-interest debt.)
If you're curious if it's the right time to refinance, contact our Hanscom FCU mortgage department. One of our mortgage specialists can go over the numbers with you and let you know if refinancing right now makes sense for your situation.
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