Should You Refinance Your Mortgage?

Buying a house is one of the biggest financial decisions you’ll ever make. Houses are expensive to purchase, and most home buyers can’t afford to buy a property outright in cash. That’s why people turn to the mortgage market for a loan. Mortgages are often 30-year terms with rates far below what you’d find with other types of loans. Plus, rates can be fixed or adjustable and the loans are backed by a hard asset—the home.

Like other types of debt, mortgages can be refinanced if our financial situation improves or lending rates move in our favor. So with rates near historic lows, refinancing a mortgage right now seems like a slam dunk, right? Not necessarily. Mortgages come with all sorts of costs and fees attached. Plus, you need to make sure you aren’t refinancing a short-term gain into long-term pain. Here, we’ll discuss whether you should refinance your mortgage.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

Why Refinance Your Mortgage?

When homeowners refinance, it’s usually for one of these reasons:

  • To lower the interest rate on the loan
  • To decrease the length of the term of the loan
  • To switch from an adjustable-rate to a fixed-rate

When interest rates are low, homeowners can take advantage by refinancing their mortgage. For example, let’s say you have a $500,000 mortgage at a rate of 4% for a term of 30 years. Over the full 30 years, you’d pay $500,000 in principal and $349,000 in interest on the mortgage (not including fees and closing costs). However, if you were to refinance that mortgage at 3%, you’d decrease the total interest cost to $259,000. That’s $90,000 in interest saved over the life of the mortgage!

Additionally, you can save money by refinancing to a shorter-term or changing your rate to fixed or adjustable. A shorter-term might mean higher monthly payments, but you’ll decrease the total amount paid over the life of the loan. Changing from adjustable to fixed might make sense financially if you decide to stay in the house long-term, while the reverse is true if you expect to move within a few years.

What to Consider Before Refinancing

Refinancing a mortgage isn’t always a good idea, even if interest rates are near historic lows. Before refinancing, make sure to consider the following factors:

  • Rate reduction. Just because you’re getting a lower rate doesn’t mean you’re saving money. When you refinance, you’re replacing an old loan with a new one, and that means new commissions and new fees. A rate reduction needs to be significant enough that you’re saving money even when factoring in these costs.
  • Credit score and home equity. These are two important factors used to determine your rate during refinancing. The more equity you have in the home, the less you’ll need to borrow and the better your rate will be. You’re mostly paying interest over the first few years of the mortgage, so refinancing might not save much money if you do it too early.  Likewise, if you’ve suffered a credit score drop, waiting to boost it might be the wiser decision.
  • Monthly payments. Seeking to reduce your monthly payment through refinancing? It’s a tempting idea, but consider the downside: you might be adding years and thousands of dollars in interest to your loan. The decision to refinance should be because you want to save money in the long run, not reap a short-term benefit.
  • Long-term plans. How long do you plan to stay in your house? Adjustable-rate mortgages make sense when the living situation is short-term. However, a fixed-rate mortgage usually works out better if your plans for the home extend beyond the term of the loan.

Should I Refinance My Mortgage Now?

Refinancing a mortgage can be a terrific way to save thousands in interest, remove burdensome private mortgage insurance, or flip your loan from an adjustable to a fixed rate. However, refinancing can also be a poor financial decision if done for the wrong reasons, such as lowering a monthly payment by extending the loan or to use home equity to pay down other debts.

So, should you refinance your mortgage now? It depends. If you can drop your interest rate significantly enough that you’re still saving money after closing costs, refinancing is probably a good decision. But always consider the long-term ramifications of refinancing, even if your plans for the house are short-term. If you’re unsure whether refinancing is right for you, consult your financial advisor before making any big decisions.

Work With an Experienced Financial Advisor

If you have any questions about refinancing your home, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today!

Disclosure

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.