Mortgage interest rates have gone up since recent historic lows, but they are still turning heads.
"They are way below the norm over the last 10 to 15 years," says Mark Burrage, director of Home Advice at USAA. "Rates today aren't at an all-time low, but they're still near an all-time low."
That's great news for those in a position to take advantage of them, but rates alone shouldn't make you jump on the refinance bandwagon. Consider other key factors first.
The Overall Picture
"We want every member to have a financial plan," Burrage says. "Part of that plan includes having a mortgage strategy."
He suggests reviewing your mortgage annually to look for potential savings, from getting rid of private mortgage insurance to refinancing your home. He also says to consider mortgage-related moves as part of the overarching plan for your financial future.
Cash Flow and Savings Goals
The low 15-year mortgage rate isn't for everyone. Sure, you'd reduce the total cost of your mortgage over time. But are you really better off if you're straining to pay the 15-year term's higher monthly payments? And what if your financial circumstances change?
If you're hurting to make that payment, this might cause other financial issues, such as missing a car payment or falling behind on retirement savings or other goals. A job loss or other unexpected expense could make the flexibility of a 30-year mortgage, and its lower monthly payments, a good thing.
"You have to determine what gets you the most bang for your buck," Burrage says. "Don't pull money away from other goals that may be a higher priority."
How Long You'll Be in the House
You will have to pay closing costs when refinancing your home, an average of $4,000, according to Zillow.com. So make sure you'll stay in the home long enough to recoup those costs in mortgage savings.
An interest rate that's 1 or 2% lower can save you tens of thousands in interest over a 30-year loan, but not if you've moved on.
"If you only plan on being in the house a few more years, it makes no sense to talk about savings over the next 30 years," Burrage says. "Refinancing is about numbers."
Options for Achieving Financial Goals
Is a refinance really the best way to meet short-term or long-term goals? Or are there ways to save money and avoid closing costs altogether?
If you want to pay off your mortgage sooner, consider making one extra payment a year or paying a little more each month.
If you're looking to free up cash, try reviewing your budget first and determine if there are other ways to reduce your overall monthly expenses.
Rule of Thumb Exceptions
Homeowners often hear, "If you can lower your rate by 1%, it makes sense to refinance." But everyone's financial situation differs.
"Avoid relying solely on a general rule of thumb," Burrage says. "Make your decision based on what works best for your specific needs."
