Borrowing

2 questions to ask yourself before you take advantage of low interest rates and refinance a mortgage

Twenty/20

Less than two weeks after the Fed cut rates by 50 basis points, rates are being slashed again, to 0%-0.25%, in an effort to buoy the economy against the coronavirus threat. Rates are now lower than they've been in several years. If you have a mortgage, now is a good time to consider refinancing: It could save you thousands of dollars.

"It's an advantageous time to refinance," says Amy Shepard, a certified financial planner with Sensible Money in Scottsdale, Arizona. "It can be a good opportunity to lower your payments, allowing you to pay off other debts."

Prior to Sunday's cut to zero, mortgage rates were 3.47% for a fixed-rate, 30-year loan, and 2.97% for a fixed-rate, 15-year loan, per data from Freddie Mac. Those rates were significantly cheaper than a year ago, when borrowers could get rates of 4.37% and 3.8%, respectively. They will now likely go lower.

The difference works out to potential savings of hundreds of dollars per month.

Many homeowners have already jumped on the opportunity: Refinance applications increased by 79% in the last week, and are up 479% from a year ago, according to data from the Mortgage Bankers Association.

But that doesn't necessarily mean you should join the crowds. There are two questions experts say you should ask yourself before refinancing your mortgage.

Can I afford the costs of refinancing?

"You have to look at refinancing in light of the rate and the overall fees you're going to pay," says financial advisor Justin Halverson of Minnesota-based Great Waters Financial.

In all, the average cost of refinancing a mortgage is more than $4,300, according to ValuePenguin. So for borrowers, the first thing to consider is whether you have that cash in hand, or if you're willing to roll those costs into your new loan, which can eat away at any potential savings.

What are my future plans?

Consider how close you are to paying off your mortgage. If you've had your mortgage for many years, it may not make much financial sense to refinance, because most of your monthly payment is already going toward principal rather than interest. By refinancing, you would create a new 15- or 30-year loan, resetting the clock on your repayment time.

Also think about your break-even point, when you'll actually start to save after you factor in the costs of refinancing. For example, someone who paid $4,000 to refinance and will save $200 a month would have a break-even point of 20 months. If you expect to move before or shortly after that point, refinancing may not make sense.

"If there is a chance that you could move for a job in a few years, it's probably less likely that a refinance makes sense," Sean M. Pearson, a certified financial planner from Pennsylvania, told CNBC Make It last year.

You have to look at refinancing in light of the rate and the overall fees you're going to pay.
Justin Halverson
Financial advisor, Great Waters Financial

Expect low rates to stick around

There's no need to rush to make a refinancing decision. Experts say that mortgage rates are likely to stay low for the time being as the Fed and government officials try to calm the markets following the coronavirus outbreak and chaos in the world energy markets

"As lenders handle the wave in applications and manage capacity, mortgage rates will likely stabilize but remain low for now," Joel Kan, an economist at Mortgage Bankers Association, recently told CNBC. "This, in turn, will support borrowers looking to refinance or purchase a home this spring."

Both new buyers and current homeowners should still be able to take advantage of the low-rate environment headed into the summer. So, if you're hoping to refinance but want to take steps to improve your credit score or save up more money to cover your refinancing costs, you still have time.

That said, there's no reason to hold off in the hope of further rate drops if you're ready and able to act now.

"Even if rates go lower, you're locking in a pretty darn good rate right now," says Halverson.

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