When Should I Refinance My Mortgage?
for when it’s right to refinance, it’s more a matter of making sense. If you’re reading this you may be considering refinancing your mortgage for one of these reasons, or maybe a different one. Let’s take some time to go through some scenarios to see if they apply to you.
When Does It Make Sense To Refinance?
This is the question you might want to ask yourself, and it will be different for almost every person. I have heard people saying it’s not wise to refinance unless you’re saving at least 1% on your rate. The fact is it takes quite a change in the market to drop rates 1 full percentage point, so you may be sitting and waiting for quite some time. It may be advantageous to explore other benefits from a smaller drop in rate and payment. I’ve seen people refinance for a quarter point lower, the payment is based on the loan size; if you have a larger loan amount a quarter point can be significant. The costs are typically the same regardless of the loan amount, whereas the only thing that differs drastically in a refinance is the taxes and insurance portion of your loan. We find that more expensive homes have higher taxes, which can increase the needed money for closing on any loan.
Let’s take a $250,000 loan amount as an example. Currently at 5% interest on a 30 year fixed. If closing costs are $1,500 and you can lower your rate to $4.75% without any money at closing, that is a monthly savings of $38. If you intend to be in the home for an extended period of time, say another 20 years (240 months) you can expect to enjoy about a $$9,120 benefit. So would you spend $1,500 to save $9,120? most people would say yes.
One thing people don’t factor into a refinance is the money they’ve already spent in interest. Let’s take the first example back into consideration, $250,000 at 5% interest. But let’s say you’ve been in this mortgage for a full year. you’ve spent about $12,500 in interest already.
The Loan at 5% would charge you a total of $375,000 in total interest over 30 years
The loan at 4.75% would charge you a total of $356,250 in total interest over 30 years.
The second option is lower, but you’ve already paid $12,500 in interest on the first loan, so you are actually spending $368,750 in total Which is still $6,250 less than the first loan. Would you spend $1,500 to save $6,250? Again, most people would say yes.
That is why we have something called a Flex term mortgage, instead of refinancing from into another 30 year term and going backwards, it allows you to pick up right where you left off. So if you have 29 years left in your 5% interest rate mortgage, you can refinance it to 4.75% at exactly 29 years. Not losing any additional interest. Pretty neat huh?
Is It a Good Idea To Refinance and Take Money Out Of Your Home?
Another question that pertains to each person individually. These loans are referred to as debt consolidation refinances. You can read this article called How can debt consolidation help you here. These loans are incredibly helpful if you find yourself swamped with unexpected debt like credit cards and personal loans, they come at a lower interest rates than personal loans because they’re secured against your home, and they often provide a much lower monthly payment because they are extended over a longer term than a normal personal loan. Your equity is a powerful tool, and if used correctly can assist you with smart financial decisions. It’s important to weigh the options by talking to a professional loan officer about this.
Refinancing Into a Shorter Mortgage
This is always (in my opinion) a good idea if you can swing the payment comfortably. The shorter the mortgage term the less in interest a homeowner pays; the interest rates are lower on shorter terms and simply because you are paying interest for a shorter period of time.
If we take the previous example ($250,000 at 5% interest over 30 years) and compare it to a 15 year mortgage.
The Loan at 5% and 30 years would charge you a total of $375,000 in total interest
The Loan at 4% and 15 years would charge you a total of $332,859 in total interest.
That’s a difference of $42,411 in interest paid. Pretty significant right? The caveat is that the 15 year payment will be about $1976.98 vs. the 30 year payment of $1,342.22. So you have to ensure you can manage the higher payment. We have a great refinance calculator here you can use.
That’s the short and skinny of it, there are a multitude of reasons you can refinance, but ensure you talk to a professional and figure out if it’s beneficial for you. As always if you want some more information you can contact me at the information below.
Thanks for reading!
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Justin Scott
Loan Officer
NMLS 878581
- C) 920-530-4484
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- F) 920-490-8967
Executive Mortgage
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909 . E Walnut Street
Green Bay WI 54301