Is It Time to Refinance?
With mortgage rates the lowest they have ever been, the question of whether or not to refinance your mortgage is coming up more and more. In an article by Sarah Davis from Money Under 30, she outlines important questions to ask yourself to figure out if a refinance would be right for you.
For most people, the end goal of refinancing their mortgage comes out to one of the following two reasons:
- To reduce the monthly mortgage payment
- To save on total interest (and time) paid over the life of the loan
The most common way to refinance is to “re-start” the term of the loan. If a person has been paying off a 30-year fixed rate mortgage for 5 years (25 years left) and chooses to go through a refinance, they will likely start a new 30-year loan at a lower rate. Depending on the loan amount and interest rates, the person may end up paying more over the now 35-year period even with lower monthly payments. See “How a Mortgage Amortization Works.”
However, there are some banks who are willing to refinance loans based on current years left. Instead of starting the 30-year over, they may offer a 25-year fixed rate mortgage therefore achieving both goals: lower payments and saving on total interest. Many banks we work with also allow our clients to choose the exact length of their mortgage, thus allowing them to avoid an amortization table reset!
Is Refinancing For Everyone?
Simply, no. Even though rates have never been lower it still may not make sense to refinance a mortgage. With any mortgage loan, there are closing costs to be paid to the bank. Some can be as low as $385 while others upwards of $5,000. As Ms. Davis puts it, “it only makes sense to refinance if you plan on staying in your home for several more years. If you may sell the property soon, don’t refinance. Most refinances take between several months and several years to break even and begin saving you money.” To find the breakeven, divide the closing costs by the monthly savings. The output is the number of months until the saving really begins (If closing is $3,000 and monthly savings is $200, it will take 15 months to break even = $3,000/$200).
And while it might make total sense for someone to go through the refinancing steps, they still need to qualify. Getting the best rates depends on the amount of equity in the home, current income, and credit score.
How Can PDS Help?
Every situation is different. With over 35 years of experience helping clients plan their future, we’re experts at optimizing a plan specific to each individual’s needs. We understand making any changes regarding finances can be stressful, and we are here to answer your questions and provide objective guidance to alleviate as must stress and anxiety as possible. PDS will work with you to understand how a potential refinance may impact your short-term and long-term plans and help to find the best solution for you.
Whether a long-time client or just searching for answers, please CONTACT US and let us help you find the optimal answers to your financial questions.
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