When Is The Right Time To Refinance?

With the Fed recently raising interest rates, many people have started to wonder if they should act on the refinance now or wait to see what happens with interest rates.  If you are buying a new home, thinking about refinancing your mortgage, or just wondering where this is all headed, it is a good time to start crunching the numbers and examining the current mortgage you have in place.  So, when is the right time to refinance?

Side note: There is “Rule Of Thumb” – the rule of thumb really boils down to a math equation which I will lay out for you here in the article.

Question 1: What Is This Going To Cost You?

  • There is always a cost to refinance. Sometimes you will hear on television these deals that say no closing costs or no cost to refinance.  What some companies do is simply roll those closing costs into the newly refinanced loan so instead of refinancing $280,000 of debt you might refinance $283,000 of debt.  Since the monthly payment difference in negligible, they figure you won’t even notice and think that they have done you a favor. There is ALWAYS a cost to refinance.
  • Typically, a refinance will cost you in the 1% to 1.5% range of your home value, but it can vary lender to lender.  Make sure you get a detailed print out of every single cost to do the refinance.

Question 2: How Long Will It Take To Breakeven?

  • What will be your monthly savings from the refinance?  This is one of the most important questions in the process because you need to know how much money you’ll save each month.  That is the reason to do the refinance.  To free up more monthly cash flow.
  • Once you know that number, you can do a rudimentary calculation to determine how many months it will take to recoup the cost of the refinance.  For example, if the refinance cost you $3,000 and you save $250 a month, it will take you 12 months to make the transaction make sense.  Remember, with the new tax laws you should consider NOT doing a home equity line of credit if you take two mortgages because HELOC are not tax deductible going forward.

Question 3: How Long Will You Live In The Home?

  • This is probably one of the most difficult questions for families because the prototypical answer is ‘I don’t know’.  It is an important question to ask yourself because it will tell you if you have long enough to meet your breakeven number.
  • You should really consider possibilities of job change, desire to change schools, etc. because if it takes you four years to breakeven on the refinance and you move in two years than it really doesn’t behoove you to do the refinance.

Question 4: How Long Will The New Mortgage Last?

  • If you take a new 30-year mortgage, will that run into retirement?  The number one flaw of refinancing in my opinion is that people forget that if that take out a new 30-year mortgage they have a new 30-year obligation unless you pay off the mortgage at a quicker rate.  What if you have to carry the note into retirement?  Can your finances handle that when you aren’t earning the income you are earning today?
  • If you take an adjustable rate mortgage, what will happen if rates keep going up?? Some families take out 3/1 mortgages or 5/1 mortgages or ARM’s and don’t consider what happens if rates go up.  The past 10 years this wasn’t much of a worry, but the odds of rates going up the next 10 years are far greater than going down.  Consider what would happen to your monthly disposable income if your rate went from 4% to 6% or even 8%.  This is an important exercise to go through.

Question 5: Have Home Values Gone Up Where You Live?

  • One reason you might want to refinance is around getting rid of PMI.  If you are paying for Private Mortgage Insurance because you put down less than 20% when you bought the home, ask yourself if prices in your neighborhood have gone up enough to get your loan to value to be 80% or less.  If the answer to this question is yes, you could consider challenging the PMI from your current mortgage or do a refinance and reappraisal altogether to get rid of that monthly burden.  For most families this could save you $80 to $100 a month on average.

If you want to set up a time to discuss this financial planning strategy or more, please go to oXYGen Financial to set up an appointment.