Mortgage rates are at a record low—here are 3 questions to ask before you refinance

mortgage rates hit a record gloomy on Friday, March 6, when the average rate on a 30-year fix mortgage hit 3.29 %, according to Freddie Mac. The previous low was 3.31 % in November 2012, on the heels of the fiscal crisis. For closely 13 million of borrowers — the highest number of candidates on criminal record — refinance could lower their current rates by 75 basis points, which could amount to thousands in savings over the animation of the mortgage.

however, before you start shopping approximately for the best rates, it ‘s crucial to remember that refinance is n’t loose. In some cases, it could take a ten or more to recoup the upfront costs. If you ‘re considering refinancing your base, your first step should be to figure out if it will actually save you money. here are three questions to ask yourself before you refinance .

1. Will you earn your investment back?

In order to secure a lower pastime rate, you have to pay close costs again, which can include bank fees, appraisal fees and lawyer fees, among other things. These costs typically run between 1 % and 2 % of your full mortgage balance, although that can vary, John Cooper, a certify fiscal planner at Greenwood Capital, tells CNBC Make It. On a $ 300,000 mortgage, for case, you would expect to pay around $ 6,000 in fees. once you ‘ve done the mathematics to figure out how much it would cost to refinance, you need to figure out how long it would take you to earn that money binding. “ It ‘s best to recoup the close costs in five years or less, ” Cooper says. “ You do n’t want to extend it excessively long, or else you ‘re not truly making a distribute of headroom. ” Say you took out a $ 400,000 30-year mortgage 10 years ago with a 4.5 % matter to rate and have already paid down $ 80,000 of your counterweight. For the following 20 years, you can expect to pay around $ 2,026 per month on the remainder of the $ 320,000 mortgage, Cooper calculates. If you ‘re able to refinance with a 3.75 % pastime rate on a 20-year mortgage, your monthly payment would drop to $ 1,897, saving you around $ 130 per calendar month. That means it would take you just under four years to recoup the $ 6,000 it cost to refinance. Cooper says that ‘s generally a dear deal. You should besides think about how long you plan to stay in your home. “ If you wo n’t be in the house long adequate to recoup the cost and time, it is not worth it, ” Kristin Baker, chief of staff at White Oaks Wealth Advisors, tells CNBC Make It. “ Have your lender run a break-even analysis so you know precisely when the savings outweigh the costs and make certain you plan to be in the base that long. ” generally, “ the longer you plan to spend in a theater, the more worthwhile a refinance could be, ” Sean M. Pearson, a certify fiscal planner at Ameriprise Financial in Conshohocken, Pennsylvania, tells CNBC Make It .

2. How seasoned is your loan?

refinance does n’t make common sense if you ‘re losing your electric potential savings to extra interest costs. “ If you are five years into a 30-year mortgage and you refinance into another 30-year mortgage, you are going second to the beginning and may pay more in entire interest, ” Baker says. however, that does n’t inevitably mean that you should refinance into a shorter term mortgage. “ If a borrower is n’t besides far into the loanword condition they may still end up paying less in interest if the rate is reduced adequate, ” Baker says. “ furthermore, most people do n’t stay in their homes for a full 30 years ; much the wax effect of the interest over the whole term is n’t realized. ” Scott Frank, a certifiable fiscal planner and founder of Stone Steps Financial, agrees that you should n’t automatically jump into a shorter term mortgage. They frequently come with higher monthly payments, and “ most people are looking to refinance because it will reduce their monthly payment which will allow them to put those funds to work in another area of their life, ” Frank tells CNBC Make It.

“ If person wants to pay off a lend faster, I prefer they get a 30-year specify rate lend and pay it as though it is a 15-year lend, ” Frank adds. On a deeply season loan, refinancing might result in the borrower owing a significant amount in pastime. But if you ‘re saving adequate each month that you can increase your monthly principal payments to pay off the loanword faster, you might be able to avoid the extra concern, he explains .

3. What are your other financial goals?

You do n’t want to spend the time, effort and money it takes to refinance merely to lose those savings to lifestyle ostentation. Think through precisely how you plan to use your newfound savings .

It ‘s crucial to look at all fiscal decisions from the bigger lens of what matters most to you in life. What are you aiming for ? Scott Frank certified fiscal planner

“ It ‘s important to look at all fiscal decisions from the wide lens of what matters most to you in life. What are you aiming for ? ” Frank says. “ And then anytime you can optimize cash menstruation, you need to constantly be thinking about, ‘Where can I put this to help with me with a better life ? ‘ ” It ‘s smart to check in on your other priorities. “ When you are considering a change to your monthly bills, it ‘s a well time to take a moment and consider your progress on early goals, such as saving for department of education, retirement or a marry, ” Pearson says. While refinancing could be a way to save money in the long-run, it ‘s not worth it if the upfront costs put you in a fiscal hole. “ Ask yourself if you have three to six months ‘ worth of savings in the bank to cover things like a job loss, unexpected home haunt or adjacent year ‘s vacation before you consider paying extra fees today, ” Pearson adds. Like this story? Subscribe to CNBC Make It on YouTube !

Don’t miss: You could save hundreds of dollars per month by refinancing your home—here’s how to do it

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