Is Refinancing right for you?
We receive many calls from homeowners today asking if they should refinance their current mortgage. Like most financial decisions, what is right for one person may not be right for another.
Each person’s situation is unique and there are many factors to consider. Let’s look at the primary reasons most people choose to refinance their mortgage.
Refinancing to lower the interest rate
When interest rates fall below the rate of your mortgage, most people begin to think about refinancing to lower their payment and the amount of interest they have to pay. You should look for a lender that will set your new loan term to match the remaining term of your existing mortgage. That way you are comparing “apples to apples”
Consideration should be given to how long it would take to recover the closing costs of the new loan with the monthly savings. Then ask yourself how long you are likely to remain in your home. Don’t forget to consider the tax implications.
If there are no closing costs, just go for the lower rate.
Refinancing to convert an ARM to a fixed rate
With today’s low rates there has never been a better opportunity to convert an adjustable rate mortgage into the security of a fixed rate mortgage – often at a lower rate! If you are uncertain how much longer you will be in your home, look for a new no closing cost ARM to extend the number of years the interest rate will be fixed before the first adjustment.
Refinancing to lower the remaining term
Refinancing to shorten the remaining term of the mortgage should not be done unless it also lowers the interest rate. If not, you should just pay an additional amount against the principle balance each month to shorten the term. If you don’t feel you have the financial discipline to do this, look for a no closing cost loan at the same rate.
Refinancing to lower the payment
Some people choose to extend the term of the mortgage to lower their payment because of a reduction in their household income due to circumstances such as, retirement or loss of a spouse’s income. If current rates are higher than the existing mortgage, carefully consideration should be given to working beyond retirement age or reducing other expenses.
Refinancing to consolidate multiple mortgages
This is primarily used to combine a higher interest rate second mortgage or home equity line into a new first mortgage. Whether this is possible depends on the current appraised value of your home. If there is enough equity to cover both loan balances, then the new interest rate should be low enough to justify the costs associated with the new loan.
Refinancing to remove private mortgage insurance – PMI
In cases where property values have increased and interest rates are low, homeowners often choose to refinance to eliminate the need for PMI on the new loan. As PMI rates have doubled since before the mortgage meltdown, the savings can be significant. This will depend on the value of the home as determined by a new appraisal, as well as, the balance of the existing mortgage.
Refinancing to consolidate consumer debt
People with high interest rate, non-tax deductible debt such as credit cards, personal loans and/or installment furniture loans, often choose to consolidate these debts using a “cash out” refinance of their home mortgage. The interest they will pay on their total debt will be much less and, in most cases, tax deductible. There must be enough equity in the home to make this possible.
For some credit cards it can take over 30 years to pay off the balance by paying only the minimum payment. While it is true that you would be turning your shorter term debt into a longer term obligation, this often makes financial sense.
If you are disciplined enough to take the money you save each month by no longer having the other debts and apply those funds as additional payments against the principle balance of the new loan each month, you will “back out” these debts from your new loan balance and actually pay off the debts faster. This can be done without increasing the total amount you are paying now. In addition, you may achieve additional tax savings.
At First Nations Home Mortgage, we work with clients each day to determine if a refinance makes sense for them. Let us “crunch the numbers” for you to see if a refinance is right for you. We never charge for this consultation!