Should I Refinance my Mortgage?

By: Sheryl Nance-Nash

To refinance or not, that is the question? The answer shouldn’t come without a great deal of thought. “The cost to refinance a mortgage is not insignificant,” says David Reischer, attorney and CEO of LegalAdvice.com.

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The Benefits of Refinancing

There are various times when it makes sense to consider a refinance. Are interest rates much lower than your current rate (not so likely right now as rates have been ticking upward)?

But with an interest rate of 4 percent, your monthly payment would be just $1,432—that’s a savings of $367 each month, or more than $4,400 each year.

In recent years though, capturing a lower interest rate was one of the most popular reasons for homeowners to refinance. For example, if you have a $300,000 30-year loan with an interest rate of 6 percent, your monthly payment of principal and interest equals $1,799.

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But with an interest rate of 4 percent, your monthly payment would be just $1,432—that’s a savings of $367 each month, or more than $4,400 each year, points out Wendy Harrington, CMO of Figure Technologies, a fintech company that helps people fund their goals.

What are some other considerations? Do you have an adjustable rate mortgage that has reset to a variable rate? You might want to consider refinancing into a fixed rate product? Are you paying a higher rate because you put down a very small down payment or because your credit score was very low when you took out your current mortgage?

Maybe you could get a better rate now if you have built up equity in your home or if your credit score has improved significantly. Has your income increased significantly since you took out your existing mortgage?

Perhaps you should consider a 15-year fixed rate mortgage and get a lower interest rate and pay lower total interest over the life of the mortgage (albeit while paying higher monthly payments).

“So, while there is no one set of ideal conditions that let you know when to refinance, there certainly a lot of questions you should ask yourself to determine if it makes sense for you right now,” says David Reiss, a professor at Brooklyn Law School, who specializes in real estate.

“So, while there is no one set of ideal conditions that let you know when to refinance, there certainly a lot of questions you should ask yourself to determine if it makes sense for you right now,” says David Reiss, a professor at Brooklyn Law School, who specializes in real estate.

What do you Hope to Accomplish?

Essentially, it comes down to what you want. Whether or not you should refinance depends on why you want to do so. “Most folks think they are going to save money, but all they are really going to do is lower their monthly payment.

When they ‘recycle’ the loan, they stretch out the term and, in most cases, pay more over their lifetime than they would if they had not refinanced,” says Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage.

If you simply need to lower payments and the lifetime cost doesn't matter, then this is fine, says Fleming. Also, if you want to change your terms, for instance, an adjustable-rate to a fixed-rate - then lifetime cost is not important, either.

“If you want to save money, however, it's important to know how to refinance in a way that takes into account how long you intend to be in your property. And sometimes it's best to leave well enough alone,” says Fleming.

When Isn't Refinancing Ideal?

If your primary reason for refinancing is to save money, it’s important to consider your break-even point and how that compares to your plans to stay in the home. Your break-even point represents how long it will take you to recover the costs of refinancing and start benefitting from the savings.

Harrington explains, “For example, if a lower interest rate saves you $200 each month and refinancing costs equal $6,000, your break-even point is 30 months ($6,000 divided by $200). If you plan to move within the next 30 months, refinancing might not make sense.’

The longer you have (and pay on) a mortgage, the more your money will apply to the principal, i.e., your equity. If you refinance into a new mortgage with a term that is longer than the remaining term on your current loan, your early payments on the new loan will primarily go toward interest, slowing the equity build-up in your home.

If your primary goal is to access the equity in your home, it’s smart to consider all your options. Traditionally, homeowners have been able to borrow against their equity in two ways: a home equity loan, which provides a lump sum of cash that you repay at a fixed interest rate or a home equity line of credit (HELOC), which allows you to draw up to a specific amount and repay those funds over a set period of time at a variable interest rate.

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