I have heard this question numerous times from clients this year. It’s fantastic that you are considering refinancing as this could be a huge cost-saver for you! But before you submit any refinance applications, here are a few things to think about when asking yourself should I refinance my mortgage because of low interest rates?
Things to keep in mind when asking should I refinance my mortgage because of low interest rates:
- Remember that refinancing is not free. You will need to pay some times thousands of dollars in fees to do this. When speaking to lenders about refinancing, be sure to ask about an estimate for fees.
- It takes time paying for your new refinanced mortgage to make sense and pay off (literally) for you. The goal of the refinance is to save enough money in your payment due to the lower interest rate, to compensate for these up front fees. And ideally, then some! So, if you plan to sell your house in the near future, a refinance may not make sense.
- What has changed since you took out the original mortgage. How’s your credit score? Your credit score will need to be pulled, and if your credit isn’t as good as it was when you took out your original mortgage, it may not make sense to refinance. What’s your home equity %? Your refinance may require a certain equity threshold. How’s your cash flow? How’s your cash flow – can you afford to cut your term down?
- There will be decisions as to what new mortgage to choose. Refinancing, or even taking out your first mortgage, makes a gamble on where interest rates are headed. Should you consider a fixed interest mortgage, or adjustable-rate mortgage (ARM)? What term do you choose? Do you currently have PMI? All of these factors will ultimately determine your final payment and interest rate – and whether the refinance makes sense.
- Also, know that your taxes may change with a smaller interest deduction. This could push you out of itemizing, and you may lose some deductions you normally may take.
I recommend speaking with a mortgage broker or at least 3 lenders to hear about what refinancing offers they currently have.
Financial Calculators
In the meantime, a calculator is a great way to take a first step in deciding if a refinance could make sense for you. A calculator often shows where the crossover point is – so given your current mortgage and what you’re paying now, versus your new mortgage and estimated closing costs – at what point does the refinance start to save you $?
Here are a few options for calculators:
https://www.bankrate.com/calculators/mortgages/mortgage-refinance-break-even-calculator.aspx
https://www.nerdwallet.com/mortgages/refinance-calculator
Any questions on whether this is a right choice for you, feel free to reach out at kponesse@ms-wealth.com.
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Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.