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Does refinancing my mortgage make sense?

Connor SmithMarch 10, 2020

Debt / Credit Protection

“Should I refinance my mortgage?” is a question we often get from our clients.  If you have recently asked yourself this question, now would be a great time to weigh your options.  First, let’s take a look at some of the items that impact what kind of rate you can get.

One big driver of the rate you are likely to get if you borrow money for a mortgage is your credit score.  An individual’s credit score can range between 300-850 points.  The higher your credit score, the less likely a lender views you to miss a debt payment or fully default on a loan.   An individual’s credit score is impacted by a variety of items, like your percentage of on time payments, length of your credit history, the number of credit inquiries you have had in the last 12-24 months, and several other factors.  If for example you miss a payment on your credit card, mortgage or car loan, it can take years to no longer impact your credit score.  So, while your credit score is something you have control over, it cannot be changed quickly.  Individuals with credit scores above 750 can expect to get the best rates on a mortgage.  Individuals with the lowest credit scores will likely have to pay higher borrowing costs, and in some cases may not be able to get a loan at all.  If you are wondering where your credit score stands, you can check with one of 3 major credit reporting bureaus, Equifax, Experian or Transunion.  Some banks and credit card companies are now offering free credit tracking features that let their customers check their credit scores as well.  While a lender checking your credit will have an impact on your credit score, inquiring into your own credit score should not.

A second driver of the rate you are likely to get on your mortgage is your debt to income ratio.   Your debt to income ratio is calculated by your income divided by your debt payments.  Debt payments include a variety of items, including but not limited, to car payments, mortgage payments, student loan payments and child support.  Mortgage lenders like to see a borrower’s total debt to income ratio below 36%, and your housing debt to income ratio (mortgage/income) not exceed 28%.  Depending on your household cash flow and other expenses, you may not be comfortable with having a debt to income ratio as high as these guidelines.  Also, keep in mind, these are maximum guidelines and there is no debt to income ratio that is too low.

The last and probably most impactful item that impacts the rate you are likely to get on a mortgage is the long-term interest rate environment.  Unlike short-term interest rates set by the Federal Reserve, long-term borrowing rates are set in the open market by supply and demand for bonds.  Mortgage rates in particular are most closely linked to the market rate of the 10-year Treasury bond.  At the writing of this blog post the market rate on 10-year Treasury bonds are at historic lows.  In fact, on Friday, March 6th 2020 the 10-year treasury bond yield closed at its lowest level ever of .70%.  This is great news if you are looking to borrow money to refinance your current mortgage, and is why now might be a great time to research this option further.

So, if you are considering refinancing your mortgage what should you do next?  First, as with making any major financial decision, you should have a conversation with your financial advisor or financial planner.  They can help determine if refinancing will make sense for you given your personal situation and total financial picture.  Then, if refinancing still seems like it makes sense it would be a good idea to reach out to a mortgage broker.  HFA works with a variety of mortgage brokers nationally and in the local community, including lenders like Schwab mortgage, so we can be a great resource to a referral to a lender.

We can emphatically say that given the current interest rate environment, refinancing may be advantageous.  We welcome your call or email to help determine if it makes the best sense for you!

Sources:

Zillow – Mortgage Credit Score
Experian – Hard vs. Soft Inquiries on your Credit Score
Bankrate – Ratio Debt Calculator
CNBC

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