Interest rates have dropped significantly since the beginning of year. As a result, homeowners have increasingly become interested in refinancing their mortgage. If you are a homeowner thinking of refinancing, there are various factors you should consider when evaluating whether this makes sense for your situation.
First and foremost, ask yourself: How long do I think I will continue living in this home? There are fixed costs associated with refinancing your home, including appraisal fees, title costs, filing fees, origination fees, etc. If the total of these costs is relatively high, and you do not anticipate living in the house for more than another year or two, you may find it is not worth it to refinance (e.g. paying $6,000 in closing costs to save just $2,000 in interest over two years). On the other hand, if you do anticipate staying in the home for a while, the amount of interest you save can more than outweigh the cost to refinance.
The next question to ask yourself is: What am I trying to accomplish by refinancing? There are several reasons to refinance your mortgage, including getting a lower interest rate, reducing the term of your mortgage, removing private mortgage insurance (PMI), and lowering your monthly payments. Lowering your interest rate by 1% and keeping the term the same should increase your monthly cash flow, since the monthly payment will be lower. If you are still paying PMI, and your house has appreciated in value (or you have reduced the principal a significant amount), you may be able to eliminate the cost of PMI by refinancing. Additionally, if you are in a better cash flow position than when you first purchased your home, consider increasing your monthly payment while reducing the term (e.g. from a 30-year mortgage to a 20-year or 15-year mortgage). This will reduce total interest cost over the life of the loan.
The answer to these questions will help inform whether the initial cost is worth refinancing and whether refinancing will help you accomplish your goals. As with any financial decision, there are often several ancillary questions that arise, which is why it is important to take stock of your holistic plan when evaluating the decision. Please reach out to B&C if you would like to discuss the implication of refinancing your home in greater detail.
The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.