It’s almost like everyone you know is getting a great rate on their mortgage these days. You might have even asked your younger sibling what type of interest rate they got on their mortgage and you just couldn’t believe how low it was compared to the one you got a few years ago.
So I guess it might be time for you to refinance your mortgage then? Is this the right time to do that when the rates are so low? Possibly, but don’t count on it. You really need to do your homework before you make a decision to refinance.
You need to really dig deep into all the numbers before you jump on board for a refinance. Why? Well, just because your interest rate and monthly payments might drop it doesn’t mean that you’re going to be saving money. It could actually mean that you’re throwing money away by refinancing.
What type of homework do you need to do before you refinance?
There’s a lot of things that you need to figure out before you even think about refinancing. So many factors come into play, and some of them might surprise you. Just because it was right for your friends to refinance doesn’t mean that you should do it too. It will be a different decision for everyone depending on a few different factors that go into play.
1- What is your interest rate right now?
2- What does it cost to refinance (remember those closing costs? Refinancing isn’t free)
3- How much of your mortgage have you already paid off?
4- How much more time do you plan to spend in this current home that you want to refinance?
Doing some homework will really help you decide if you should refinance. However, here’s a quick list of the top 3 reasons why you shouldn’t refinance
1- You’ve already paid off a lot of the mortgage you have now
I’m going to start with this one because it’s probably the most controversial idea behind why you shouldn’t refinance. If you have a 30 year fixed rate mortgage and you’ve only paid off a few years of it, maybe 1-5, then you’d do better with a refinance than if you were already 10 or more years into your 30 year mortgage. (another way to look at it is if you’re already more than a third of the way through the years you need to pay it all off).
Why is this though? The reason is because in the beginning of the mortgage loan you’re going to be paying off interest mostly. As the years go on you’ll be paying less interest and more of your principal. So if you refinance what happens is that you’ll be starting all over again and have to pay more interest again at the start of the new refinanced loan.
Some will say this is a terrible thing to do while others may not really think that. It really boils down to what you need in life and what you think you’ll need in the future. If your monthly payments are too high right now and you need to lower them then refinancing at a lower rate for another 30 year mortgage might make the most sense for you.
Another thing you could consider doing is refinancing at a 15 year or 20 year term instead of 30 years. This would lower the amount of interest you’d have to pay off over the years, and if you’re lucky then the new lower rates might make it so that your monthly payment doesn’t change too much. It’s definitely something you should consider.
If you want want more leverage with borrowed money though then some might say to go for those low rate 30 year fixed rates where you’ll have a lower monthly payment. You can then take your money that you save each year and invest it elsewhere in hopes of getting a better rate than what your mortgage is costing you. If your mortgage is costing you 4% then it might make sense to get a 30 year fixed and then invest the money into the stock market where you can make 8% on that money.
2- You want to move soon
If you’re planning on moving anytime soon then you shouldn’t refinance. It just doesn’t make any sense. Why? Because it all boils down to your closing costs. You can’t just apply for a better rate and get it for free. You’ll have to pay “closing costs” in order to get that rate. The same type of fees you paid when you bought the house.
If you’re planning on selling and moving somewhere else then you’d do better by just selling without refinancing. Then when you buy your new home you’ll have a lower rate over there. If you refinance and then move to soon you won’t make up those closing costs.
3- The rate isn’t low enough to benefit you after the cost of refinancing
The cost of refinancing can be anywhere from 3% to 6% of the loan amount. If you want to know the exact amount for your area then you’ll need to do a bit of research to find out because it’s different everywhere and it can change over time. If it was free to refinance it would be a no brainer to go ahead and do it, but you have to deal with closing costs. That’s where the 3% to 6% comes into play.
If the interest rate isn’t that much lower than what you already have then it might take you many years before you get to the break even point. That’s when your lower monthly payments finally put you ahead of the closing costs you had to pay to get into the new loan.
You’ll need to sit down and do the math to be sure of the numbers, but it could take more than 5 years for you to hit that break even point. If you’re the type that likes to move a lot then it definitely doesn’t make any sense for you to refinance. If you love your neighborhood though and plan to be there for a long time then maybe.
However, consider this. Do you plan on having any kids? Maybe more kids? Maybe you’ll have to change jobs or maybe you’ll have to move closer to a loved one to take care of them? There’s a lot of unknowns that could make you move, but some of them might be planned, like wanting a larger family. Usually with that comes the needs for a larger place. If moving to a bigger place for a bigger family sounds like something you might need to do then you probably shouldn’t refinance.
In the end it really all comes down to the math. If you’re unsure of it then get someone’s advice that understands what is going on. It would be irresponsible of me to tell you that you should refinance or that you shouldn’t because of this reason or that reason. Really, you need to fully evaluate your own situation to figure out what’s best for you.