Last week, 30-year mortgage rates plunged to near record lows, leaving privy homeowners everywhere asking, “should I refinance?” In response to those inquiries, we are introducing a new series, Refinancing Recommendations, laying out critical considerations for refinancing into a 30-year, 20-year or 10-year mortgage. In this first installment, we acknowledge the importance of the refinance rate, but suggest asking yourself two key questions of even greater value.
Low rates are great, but more important is when you will recoup the cost to refinance into your new-and-improved loan, reaching your break-event point. Like a purchase loan, a refinance requires the payment of closing costs – often amounting to 1.5 - 3 percent* of the loan amount – which means that the initial refinancing cost may outweigh the immediate savings. However, if you plan to remain in your loan for an extended period of time, the monthly savings afforded by a refinance could allow you to break-even quickly—and begin accumulating more savings thereafter. Consult a mortgage banker to pinpoint your break-even point.
Homeowners refinance to achieve a wide range of financial goals, including cashing out on equity, consolidating debt, or converting an adjustable rate loan to a fixed rate. If you’ve only been in your 30-year mortgage for a few years, however, the range of financial goals you can achieve is likely more straightforward. Your equity stake is likely not large enough to justify a cash-out refinance, and your mortgage is likely rate-fixed. Therefore, a few refinancing goals stand out:
Lower your monthly payments.
Provided your break-even point aligns with your future plans for remaining in your home, this refinance option could help you increase your savings over time.
Shorten Your Loan Term.
A shorter loan term could save you a significant sum of money in interest payments, and a shorter mortgage term generally also means a lower interest rate.
Pursue a Cash-in Refinance
A rare refinance goal, cash-in refinances do make sense in certain situations. A cash-in refinance is a refinance in which you bring money to the closing table to reduce your mortgage balance. Paying down your mortgage balance during a refinance can allow you to remove private mortgage insurance premiums, take advantage of today’s low rates, or enable refinancing a mortgage on a home with reduced property value. When considering a cash-in refinance, consider how much you would save in interest, how much the money you’d put in could earn you elsewhere, and if you’re taking full advantage of your tax-deductible retirement accounts.
Asking the right questions is critical to making your home financing work for you – and Apex\’s Certified Mortgage Planning Specialists are at your disposal to help. Simply put, today’s interest rates make it a great time to refinance. To embark on the path to achieving any of the goals discussed here – or if you simply would like to identify your break-even point – contact us.
Please be aware: by refinancing your existing mortgage, your total finance charges may be higher over the life of the loan
*consult your mortgage banker for specific loan terms