Many homeowner’s ponder refinancing after rates drop. However, the barrage of misleading internet solicitations seeing clearly whether refinancing your mortgage is right is tricky.
Learn about the following:
- Does refinancing make sense?
- Evaluate the long term costs of a refinance
- Do I refinance now or wait
- Refinance into a shorter term or for a lower payment
- Where to get advice
Does Refinancing Make Sense?
Falling mortgage rates trigger homeowner’s refinance thoughts to stir. Right behind follow analytical questions about the benefit and viability a refinance offers. Factoring in the right components and factors can make the question of “should I refinance” bubble up crystal clearly.
From comparing current rates and payment options to your rate and payment are key. Additionally, looking at amortization terms, cost recoupment and future financial plans are just as critical.
Long Term Refinance Costs
While a lower payment is great, so too is looking at the long term costs of refinancing. In fact, comparing refinancing and doing nothing (aka – staying in your current loan) is a simple yet often overlooked measurement. Looking at long term costs include several components. For example, these 3 ideas are noteworthy:
- Closing costs for the refinance
- Recoupment period (savings vs. cost of refinance over time) – also called “breakeven point”
- New loan term vs. remaining original loan term
Refinance Now or Refinance Later?
Timing the market is important. In this instance, “the market” refers to the interest rate market. However, how should you go about this? Many say hold out for the lowest possible rate. That is impossible. In fact, for these 2 simple reasons it’s also not advisable:
- No one knows when rates are at the lowest point
- While waiting – you continue to pay your current mortgage at a higher rate
The cost of waiting is a sneaking cost able to negate or dilute the powerful savings refinancing has to offer. The saying “trip over a dollar to pick up a penny” sometimes applies here. The idea is that while waiting for the lowest rate in history, the cost of making x number of mortgage payments at your current/higher interest rate can take away from the future savings of the “ideal” rate.
On the flip side, waiting may also be the right move. Its all contextual and dependent upon each individual homeowner’s circumstances and goals.
Smaller Payment or Smaller Term?
In most cases, refinancing to a lower rate 30 year mortgage and refinancing to an even lower rate 15 year mortgage both offer significant benefits. Additionally, an Adjustable Rate Mortgage (“ARM”) presents even more opportunities? However, each option differs from the other in terms of benefits and monthly payment.
In short, a 30 year will provide a lower monthly payment while a 15 year term pays the mortgage off sooner. On the other hand, ARM’s typically provide lower rates but you trade in some security to garner this benefit. Depending on what a homeowner’s budget is and what their investment habits are each of the above may be the best way to go.
Get Good Advice
In conclusion, the most important step when refinancing is partnering with an experienced mortgage team. This way all options are weighed against your goals. The end result is refinancing into the best mortgage plan possible.
By Jeremy House