Have you heard about the record-low interest rates on home loans these days? Unless you’ve been living under a rock, chances are you have seen the advertisements, received some direct mailers, and had home mortgage companies telling you that you should refinance because rates are so low right now. They are pretty low, and they have been for a while, but interest rates aren’t the only factor you should be taking into account before you decide whether or not to refinance. There are some situations when refinancing is either a bad idea, or it could end up costing you more than you save.
Long-Term Home Ownership
If you’re planning to sell your home in the next few years, chances are the costs and fees associated with refinancing your mortgage will outweigh the savings over time. For most homeowners, the “break-even” point after a refinance is a few years, so even if you save $100 a month on the payment, if you add $5,000 to the total amount you owe, it will take you 50 months (that’s over 4 years) to reach break-even. If you’re planning to stay in the home forever—or at least for several more years—then the cost savings is likely worth it because you’ll get to continue taking advantage of those interest savings for the life of the loan.
Not Enough Savings
The main reason (it could be argued one of the only reasons) to refinance is to save money on interest, but before you go ahead with the process, take a minute to calculate exactly what you will save with the mortgage refinance and decide whether it’s worth the effort and the cost. Most refinance loans include some additional loan processing costs, and you may not be able to qualify for an interest rate much lower. If you’re going to be saving $15 or $20 a month, that’s only a few thousand dollars, and might not even be much more than the fees.
Early Loan Repayment
If it’s financially feasible, it’s a good idea to try and pay off your home mortgage before the 30-year term is up. Some homeowners think that the best way to do so is to refinance into a 15-year loan, and in some situations that is true. However, while that guarantees a shorter term for the loan and may not have a lot of additional monthly cost involved, it might be just as well to take the difference between a 30-year and 15-year payment and pay that toward principal. You’ll still pay off the loan early and achieve those cost savings, plus if something unexpected happens, you won’t be locked into a higher monthly mortgage payment.
One time when it definitely makes sense to refinance is at the end of an adjustable-rate mortgage period. An ARM allows you to have a lower interest rate at the beginning of a home loan, but eventually it goes up according to market rates. If the low-interest part of your ARM is coming to an end, now is the ideal time to refinance.
If you have equity in your home and other debt that you need to pay off, refinancing with a cash-out option will allow you to take the extra money made from the refinance as cash and pay down other debt. In many cases the interest rate you’ll pay on a home loan will be far lower than you would pay on a revolving credit account, so the move will save you money and give you more time to pay down the loan (a 30-year mortgage term). Make sure you’re opting for the cash-out choice because it’s the best choice for your financial situation, though, and not just because you want some extra spending money.
To find out more about refinancing your mortgage and talk to an expert who can help you decide if it’s the right move, call Altius Mortgage today.