Have you wondered whether or not now is a good time to refinance your mortgage? With interest rates at a recent low, many people are questioning whether now is the best time to move forward with refinancing at a lower interest rate. It’s true that a lower mortgage interest rate can potentially save you thousands of dollars over the life of the loan. However, refinancing isn’t for everyone! Let’s look at when refinancing may not make sense for you.
You’re Planning to Pay Off Your Mortgage Soon
If your mortgage is close to being paid in full, the hassle and expense of refinancing may not make sense for you. Refinancing can cause a slight dip in your credit score, and you may owe more than you realize in closing costs upon refinancing. When you’re planning to pay off your mortgage in five years or less, refinancing likely isn’t for you.
You Plan to Sell Your Home
Are you looking to move in the next few years? Having to obtain a new mortgage for your new home when you move should be your first priority. At that time, you may be able to finance your new home for a lower interest rate.
Your Mortgage Rate is Already Low
When you research refinancing, if you find that your current mortgage interest rate is lower than any offers or estimates you receive, refinancing obviously doesn’t make sense.
However, even if your interest rate and a potential new interest rate are similar, the total savings may not be worth what you’ll pay in closing costs and time. Make sure you do a comparative calculation to see how much you’d save over the life of the loan (minus any closing costs or fees associated with the refinancing). From there, you can determine whether the total amount you’ll save is worth your time and energy to go through the refinancing process.
One reason many people avoid refinancing their mortgage is that they’re concerned that refinancing their mortgage will extend the length of their loan by an additional 10-30 years (depending on loan terms). It’s important to know that this isn’t accurate. Even if you refinance with a new 30-year mortgage, you can choose to pay off your mortgage at any time, or pay more toward the principal and reduce the term. This can be beneficial for homeowners who want to lock in a lower monthly payment and put large payments toward their mortgage a few times a year with savings or extra cash flow to lower the loan’s principal and pay it off more quickly.
If you’re wondering whether or not refinancing is for you, you can look to follow the rule of thumb when it comes to mortgages:
Look at the total closing costs associated with your refinancing. Divide that number by the total amount saved per month on your mortgage principal and interest. This is your “break-even” point. For example, if you’re looking at closing costs of $5,000 and you’re saving $500 per month on your payment, it will take 10 months to break even, and after 10 months you are saving on your mortgage.
This can help guide you to see whether or not a mortgage refinance is worth the total savings depending on how long you plan to stay in your home.
If you’re considering refinancing your mortgage, it can help to speak with a financial planner to help evaluate your options. Reach out to us today if you have any questions – we’re here to help!
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.