If you’ve been a homeowner for a long time, you’ve probably seen your fair share of changes in mortgage rates and refinancing opportunities. You may remember the days where mortgage rates were in the double digits. Now, mortgage rates are at record lows, and there is the potential to refinance at current mortgage rates of 2.5% to 3%! These low interest rates are attractive and could give you the opportunity to lower your payment, lower your term or even cash out. However, refinancing can also be a hassle and pricey, so it’s important to make sure that refinancing is in your best interest. I’ve laid out four things to consider before refinancing your current mortgage to make sure you are making the best financial choice for your specific situation.
- What term length do you want?
Choosing the loan term is a very important decision, and you should work with your mortgage broker to consider all of your options. There are positives and negatives to all terms, whether you choose a 15, 20- or 30-year term. A 15-year mortgage is great, because you can pay it off faster and get a lower interest rate, but that also means your monthly payment will be higher. A 30-year mortgage is also a good option because it keeps your payments lower and more manageable. When you are considering your loan term, consider your cash flow and what you can realistically afford. Another major factor when choosing your loan term should be your current mortgage loan term and years remaining. If you refinance, you will be starting over with a new loan term on a new 15-year or 30-year payment plan. For example, if you have 7 years left on your 30-year mortgage, it probably doesn’t make sense to get a new 30-year mortgage and start all over with 30 more years of payments, when you are only 7 years away from paying your existing mortgage off.
- What is your breakeven?
The closing costs associated with a refinance can be daunting. But don’t let the closing costs, usually taken as a percentage of your loan amount, scare you away. Chances are, at current rates, your breakeven point could turn out to be less than a year. Prohibitively high closing costs are a red flag for a bad refinance. Compare the closing costs with how much you will save each month by lowering your payment and calculate how long it will take you to make up the closing costs. This is an especially important factor if you are planning on selling your home in the near future.
- How long do you want to keep the property?
Before you decide to refinance, you should consider how long you want to stay in your home to determine if refinancing makes sense in the long term. As above, you want to make sure the closing costs are worth it, so plan to stay in your home longer than the breakeven point. For example, if your breakeven point is 12 months, and you want to stay in your house for the foreseeable future, you shouldn’t let the concern of the closing costs scare you away. You would actually make up the closing costs in 12 months. Conversely, selling your home before you reach breakeven would make the cost and effort of your refinance worthless. Another factor to consider is whether or not you want to turn your home into a rental property in the future. Rental properties and second homes often do not get mortgage rates as low as primary residences do. So, if you have any interest in turning your current home into a rental someday, now could be a great time to lock in lower rates before it’s a rental property.
- Are You Interested In Cash Out Opportunities?
With interest rates this attractive, it could be a good opportunity to cash out and take some equity out of the property. This opens up options to keep more cash on hand, buy another property or pay off higher interest rate debt. Although this is a good opportunity for some, cashing out should be something you consider with caution because it requires taking on more debt. Sometimes people think it’s a good idea to cash out on some of their equity and increase their mortgage to pay for a house remodel. But what many overlook is that the money taken to remodel is now rolled up in your 30-year mortgage. So, you are now paying for that kitchen remodel for the next thirty years. And, chances are, you will have to remodel that kitchen again in thirty years. Cashing out can be a great option in certain circumstances, but it’s important to understand the consequences of taking on debt.
Current low interest rates offer many opportunities and it may be a perfect time for your family to refinance. First, however, you should compare all the pros and cons in order to decide if refinancing is right for your situation right now and into the future. Talk with your mortgage lender and explore what options you have. At Amy Noel, Inc. we would love to talk with you and run projections for you to find out if refinancing is best for you. Give us a call today if you need a referral for a mortgage lender or if you need someone to lay out your options and evaluate potential breakeven with you.
ALANA MACY, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.