The refinance discussion has happened so many times over the past decade that it’s become something of a financial cliché. Yet here we are again, raising the notion of whether you should consider refinancing. That’s because interest rates have declined dramatically since the Federal Reserve Board (Fed) announced a halt in rate increases. Long-term bond yields have fallen precipitously, lowering mortgage rates just in time for the Spring real estate market. Whether you’re buying a home or not, consider these four good reasons to refinance now.
Mortgage rates are currently hovering around 4% for a 30-yr conventional mortgage. They’re in the low 3% range for a 15-year mortgage. If you’re thinking of buying, these are very attractive financing levels.
If you already have a mortgage, here’s what to consider.
Your Mortgage Rate Is Higher
One of the most simplistic reasons to refinance is if your mortgage rate exceeds current rates. You’ll benefit from lower monthly payments, and capturing a lower rate over decades can dramatically reduce the cost of your loan.
Example: You purchased a home last year with a $500,000 loan that originated at 4.5%. Your remaining costs to pay off the loan total $884,166. If you refinance at 4% (with $4,000 in fees), you could reduce your monthly payment by $163 per month, and your total repayment costs to $840,888, saving more than $40,000 over the life of the loan.
You Have An Adjustable Rate Mortgage (ARM)
A prominent reason to refinance is if you’re holding an adjustable rate mortgage (ARM) where the rate is only guaranteed for a short period of time. ARMs typically offer lower rates, but they come with risk. Unless you plan to sell your house around the time the rate adjusts, you could be subject to much higher interest rates once the loan adjusts. If you have an ARM and are contemplating keeping your home, this is a prime time to consider refinancing.
You Have Other House-Related Debt
Another strong reason to consider refinancing is if you’re holding other house-related debt on a home equity line of credit (HELOC), credit cards, or some other form of debt. The cost of HELOCs and other debt instruments have been rising as interest rates go up. In fact, we strongly encourage you to examine your HELOC rates and other debt rates, given recent rate increases. You might be surprised by the rate you’re paying! You may be able to reduce overall borrowing costs by consolidating home-related debt into a single mortgage, bringing down the rate on all debt, to a more manageable level.
You Want To Pay Off Your Mortgage Faster
Perhaps the best financial reason to refinance is to pay down your mortgage faster by converting to a 10-year or 15-year loan. The rates are compelling, at close to 3%, and a shorter-term loan could better position you to achieve your financial and retirement objectives.
Example: You have 25 years remaining on your $500,000 mortgage at a rate of 4%. Your remaining payments total $716,123. If you refinance to a 15-year mortgage at 3.375% (paying $4,000 in closing costs), your payments increase by $840 per month, but total costs for the loan drop to $573,668, saving more than $140,000 and becoming debt free 10 years earlier.
However, before truncating your mortgage term, be sure that your income and earnings are – and will remain – adequate to support the higher monthly payments over the entire term of the loan.
When It Does NOT Make Sense To Refinance
Refinancing doesn’t always make sense. Here’s what to consider before moving forward.
Your Loan Balance Exceeds $750,000
Recent tax changes now limit the mortgage interest deductions to the first $750,000 of mortgage debt, down from $1 million. If you had a mortgage in excess of $750,000 prior to tax law changes, you’re grandfathered, and might not want to risk losing those tax deduction benefits.
You Might Sell Your Home In The Next Few Years
Refinancing typically means two things:
- Your outstanding loan balance will increase if costs are rolled into the loan.
You reset your amortization table, meaning you’ll pay more interest compared to principal at the beginning of your new refinanced loan. - If you plan to sell in the next few years, these two factors combined can result in you owing more when you sell, before you really start to recoup the costs of refinancing. If you’re contemplating a future move, examine the amortization table carefully beforehand.
Refinancing Fees Could Negate Cost Savings
Refinancing isn’t free. It comes with costs, including lender fees, appraisals, taxes, title insurance, escrows, and more. It’s important to inquire about fees upfront as high fees can quickly negate the cost savings of refinancing.
You’re Close To Paying Off Your Mortgage
If you’re within a few years of paying off your mortgage, it probably isn’t worth refinancing, as doing so restarts the mortgage clock all over again.
SageVest Wealth Management advises on the totality of your finances, providing services that span your investments and financial planning needs. We recognize that your home may be your single largest asset – and your single largest liability. We’re happy to engage in mortgage or other analysis as part of our ongoing professional relationship with you. Contact us today to find out how we can help you navigate the current rate environment and reap any benefits that lower mortgage rates might offer.
