Mortgage rates in Virginia and across the country have repeatedly hit new lows this year, and they’re expected to stay low for most of the coming year. This means it’s a great time for Virginia homeowners to refinance their mortgages and save a lot of money on their monthly payments. Or pull out equity in their homes for other expenses or investment opportunities!
However, starting a Virginia refinance isn’t as simple as flipping a switch, So, how can you tell when it’s the best time to refinance? There’s not a convenient, one-size-fits-all answer, but there are some guidelines you can follow that will help you determine if the time is right for a Virginia refinance.
The Break-Even Method
Refinancing involves the same steps as applying for a “normal” mortgage, which means you will need to pay closing costs. These costs can range from 2% to 6% of the loan amount (although the average is closer to 2% or 3%), which will equate to several thousand dollars, at least. If you’re going to refinance, you’ll want to make sure that you can recoup the cost of refinancing within a reasonable period.
For most people, that “reasonable period” means before selling the house. The break-even method says that the total amount of savings you receive from a Virginia refinance should at least equal the amount spent on closing costs within that time. The Mortgage Reports offers the following example to illustrate this:
- Refinance closing costs and fees: $3,000
- Monthly savings: $300
- Time to break even: 10 months
Lower Monthly Payments
This is arguably the most common reason people decide to refinance their homes. Not every Virginia refinance will yield massive savings—after factoring in the closing costs, you may end up saving a couple thousand dollars and not much more. Savings are savings, of course, but it’s important that you do some of the math before starting the refinance process so you know what expectations to set.
With that said, a Virginia refinance does have the potential to save you a great deal of money. Just look at this example from Fox Business:
- Suppose you have a loan balance of $200,000 with an interest rate of 4.35%. Approximately speaking, this means you would be paying around $984 per month (not including property taxes and insurance) and around $154,000 in interest by the time the 30-year loan is done.
- If you can refinance that loan down to a 3.25% interest rate, you would shave $114 off your monthly payments (equating to $1,368 a year), resulting in up to $40,000 in savings by the time you’ve fully paid off the loan.
Change Your Mortgage Type
A Virginia refinance can also be used to exchange one mortgage program for another. For example, if you have an adjustable-rate mortgage (ARM) with an introductory rate of 3.5%, but want to change that into a fixed-rate program, refinancing makes that possible. Adjustable-rate programs are great, since they offer lower rates upfront, but because they are only fixed for a certain amount of time they can be less-than-ideal for some homeowners, which is where refinancing to a fixed-rate alternative can come in handy.
You can even change a 30-year plan to a 15-year, if you wanted. That would necessitate higher monthly payments, most likely, but if you can manage that, being free of the mortgage in less time may be worth it. This also greatly reduces the interest expense over the life of the loan.
Get in touch with Poli Mortgage today if you want to learn more the Virginia refinance opportunities you can (and should) take advantage of!