Mortgage payments are one of the biggest monthly expenses in most households, so it makes sense that refinancing is often on people’s minds. Is now a good time to refinance? Would I qualify for a better interest rate? Could I save money or shorten my loan repayment period? While some people know the answers to these questions right away, there are financial planners for the rest of us.
There are a number of reasons why you might want to refinance your home loan: To get a better interest rate, to borrow against the equity you’ve built in your home, to shorten (or lengthen) the term of your loan, to convert from an adjustable-rate to a fixed-rate mortgage, or if you need to roll two or more loans together.
You might also benefit from refinancing if your home has significantly increased in value, or if you’ve reached at least 20 percent equity in your home and can get out of paying Private Mortgage Insurance (PMI).
Just as many factors in your life will also determine the answer to whether you should refinance. What are my long-term goals for my home? Will I relocate in retirement? Should I downsize? A financial planner who takes a holistic approach to financial planning can take your entire situation into consideration and see how the decision to refinance can affect your long-term goals.
Can You Get a Lower Interest Rate?
One of the more common reasons people refinance a mortgage is to secure a lower interest rate, because a lower interest rate means saving money. Maybe your credit has improved since you initially took out the loan, or interest rates went down. Depending on the difference between your existing interest rate and a new one, you might be able to save thousands of dollars in interest over the life of your loan, and more than likely, even reduce your monthly payments.
By refinancing your mortgage at a lower interest rate, you can not only save money, but you can also build equity in your home more quickly.
If you can obtain a new mortgage rate that is at least 1 to 2 percent lower than your current rate, refinancing your mortgage might be a good option. But this also depends on factors such as the amount you’re borrowing. (A 1 percent reduction on a $650,000 mortgage would be a more significant savings than a 1 percent reduction on a $100,000 mortgage.)
Before you apply, it’s a good idea to check your credit score to get a rough idea of whether you’ll qualify for the best rates available. It’s also wise to discuss your plans with a financial planner, to see if refinancing your home coincides with your long-term plans.
What Impact Would Refinancing Have?
Interest rates are not the only factor you need to think about when you’re considering refinancing. You’ll also need to decide on the type of mortgage (adjustable or fixed rate) and the length of the repayment term.
Don’t automatically assume just because you’re eligible for a lower interest rate that the new loan would be better – that lower rate and monthly payment may come with a fresh set of 15 or 30 years’ worth of monthly payments, which could mean paying significantly more in interest over the life of the loan.
The same goes for the term of a loan. Interest rates are usually lower for 15-year loans than for 30-year loans, and because of the shorter term, you’ll pay less interest. However, your monthly payments will probably be higher. If you can’t afford the higher monthly payments, it doesn’t matter how much lower the interest rate is. You’re better off taking the longer loan than defaulting on your mortgage.
And don’t forget to account for closing costs. Refinancing, like taking out your first mortgage, comes with fees that can often be steep: It’s typical to pay between 2 and 6 percent of the overall amount you’re borrowing to cover things like the application fee, appraisal fee, title search, inspection, origination fee, etc.
When it Doesn’t Make Sense to Refinance
Refinancing (and paying off your mortgage early) can save you serious money, but there are a number of circumstances where it just isn’t financially responsible to refinance. For example, if you plan to sell your home and move in the next few years, you might not have time to reach the break-even point, in which case refinancing could cost you more money than it could save you.
You may also not want to refinance your mortgage if your credit has suffered recently and you won’t qualify for a lower, better interest rate.
Another situation where you may want to pump the brakes is if you’re trying to take a cash-out mortgage refinance to consolidate high-interest debt. If you think you may be likely to repeat the cycle and run up the debt again once refinancing clears the slate, this can only intensify your debt problems, costing you equity and adding years to your mortgage, not to mention the money you spent on closing costs. Before you go this route, talk with a financial planner to discuss alternatives to deal with your high-interest debts.
What to Look for in a Financial Planner
As with just about any other major financial decision, you might feel more confident in making a decision about refinancing your home after talking to a professional about your situation. A financial planner can help you weigh your options and decide if refinancing now is an appropriate financial tool at your current disposal.
However, not all financial planners are the same. There are some, for example, that only deal with very high-net-worth individuals. Then there are financial planners for all of us – a fiduciary financial advisor who will put your interests first.
If you’re looking for a financial advisor in the San Antonio area, contact PAX Financial Group to see how we can help.
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