Your mortgage is many things. It’s an obligation, an investment, and throughout its life, an opportunity to build equity and save money. While many components comprise the cost of your home’s mortgage, two key factors are interest rate and loan term.
The term of your loan is established at origination, typically 30 years. There are more accelerated options, like a 15 or 20 - year term. The longer your term, the lower your monthly payment; however, you will pay more interest over the life of the loan. The shorter your term, the higher your monthly payment; however, you will pay less interest over the life of the loan. You will also build equity in your home more quickly and own your home outright sooner.
Your mortgage interest rate is also determined at origination and is based on the market at that time. As market conditions change, interest rates fluctuate. If you have a fixed-rate loan, your interest rate will not change over the life of the loan thus, it is advantageous to lock in a low interest rate. When fluctuations in interest rates occur, it may present an opportunity to refinance your mortgage, changing the interest rate, and if it makes sense, the term of your loan.
How Do You Know if it’s a Good time to Refinance Your Mortgage?
When determining if you should refinance, it is important to consider a few things. Are you planning on moving in the next few years? If so, it may not be a good idea. Will you be reducing your interest rate by at least half a percentage point? It may be worth considering. Will you be going from an adjustable-rate mortgage to a fixed-rate mortgage? Could be another positive. While every situation is different, taking advantage of lower interest rates will always have its benefits.
If you can recoup the closing costs to refinance in a short amount to time, it is usually a good idea. Meaning if you are now saving $200 each month, and the cost of your refinance was $3,000, it will take you 15 months to break even; everything past that point is savings for you! If you are planning to move in the next 15 months, it may not make sense to refinance.
Should You Change the Term of Your Mortgage?
When you reduce your mortgage’s term, you are compressing your repayment schedule, resulting in higher increased monthly payments. However, shorter terms tend to carry lower interest rates, meaning more of your higher payment goes toward your principal balance. If you can afford a higher payment, refinancing to a 20-year or 15-year mortgage can be very advantageous.
As interest rates fall, transitioning from a 30-year mortgage to a 20-year or 15-year mortgage becomes a more feasible option.
If you are considering refinancing your mortgage as interest rates drop, you need to consult with an experienced, trusted loan officer and mortgage company. For over 90 years, the knowledgeable staff at Standard Mortgage has helped homeowners navigate the home buying process, as well as the considerations to make when refinancing.