Should I Refinance My Home?
To decide if refinancing is the best option for your family, start by asking yourself these questions:
Why do you want to refinance?
There are many reasons to refinance, but here are three of the most common ones:
- Lower your interest rate and payment – This is the most popular reason. If you have an interest rate that is higher than the current market, it might be worth seeing if you can take advantage of the current lower interest rates, to reduce your monthly payment and overall cost of the loan.
- Shorten the term of your loan – If you have a 30-year loan, it may be advantageous to change it to a 15 or 20-year loan to pay off your mortgage sooner.
- Cash-out refinance – With home prices increasing, you might have enough equity to cash out and invest in something else, like your children’s education, a vacation home, an investment property, or a new business.
- Cash-out to Consolidate Debt – With home prices increasing, you might have enough equity to cash out and consolidate debt.
- Eliminate PMI – If you purchased your home and were required to pay private mortgage insurance, eventually you will have the opportunity to remove that. If your heart has appreciated to support a LTV ratio of <80% (current loan amount / new appraised value of the home) then this may be a great opportunity to save some money.
Once you know why you might want to refinance, ask yourself the next question:
How much is it going to cost?
There are closing costs involved in refinancing, and these costs will run between 1.5 – 3% of the loan amount. The higher the loan amount, the lower the percentage will be. The loan new amount can generally be increased to cover this cost if you prefer not to come out of pocket.
There are also options for no-cost refinance loans, click here to learn more about how this works.
If you’re comfortable with the costs of refinancing, then ask yourself one more question:
Is it worth it?
This is a little bit trickier. If you are just trying to get a lower rate and payment or shorten the term, you simply want to look at the total cost of interest you are paying over time and divide that by the cost of doing the mortgage (closing costs). This will give you the breakeven point in terms of the amount of time it will take you. If you feel like you will stay in the home longer than that amount of time, then it probably makes sense. We have a rule of thumb here that says we like that to be less than two years and preferably less than 18 months. We have a program called mortgage coach that allows us to do a simple comparison for you to show you exactly what that breakeven number is. If you are taking cash out to consolidate debt, we have a wonderful program where we can plug in all of your outstanding debt and show you how this will impact you over the next 5 to 10 years or longer.
If, however, your current home does not fulfill your present needs, you might want to consider using your potential refinance costs for a down payment on a new move-up home. You will still get a lower interest rate than the one you have on your current house, and with the equity you’ve already built, you can finally purchase the home of your dreams.
There are many opportunities for growth in the current real estate market. To find out what’s right for your family, let’s get together to help you understand your options and guide you toward the best decision.