After nearly a decade of historically low interest rates, the Federal Reserve’s funds rate gradually started increasing in December 2015. While the funds rate doesn’t immediately affect home mortgages, you may be worried that, if mortgage rates increase and you don’t refinance your home soon, you’ll miss the opportunity of a lifetime.
Mortgage rates move up and down, seemingly with a mind of their own, and irrespective of Federal Reserve policy, so don’t panic when you hear that the Fed is raising interest rates.
It is true, though, that refinancing your home could save you hundreds of dollars a month, and tens of thousands over the life of your mortgage. It could also be a complete waste of time and money. Everything depends on your unique situation and your plans for the future.
When to Refinance
There are several reasons to refinance your home. You may want lower monthly payments, you may want to reduce the total payout over the course of the loan, or you may want to shorten the term of your loan. It makes sense to refinance if:
- Your credit score has improved since your initial mortgage. An improved FICO score reduces your monthly payment and can save tens of thousands of dollars over the life of your loan.
- You want to reduce the length of your loan. If you’re 50 years old with a 30-year loan, you may not want to be locked into a mortgage payment until you’re 80. A 15-year mortgage will cost more every month, but you’ll save a lot in interest payments and the house will be yours in half the time.
- You want to switch from an adjustable rate mortgage (ARM) to a fixed rate. Many people start out with adjustable rates because the monthly payment is initially lower; however, if your ARM is about to adjust or if interest rates are on the rise, switching to a fixed rate is a good idea. You may pay more per month, but your payment will be predictably the same for the length of the loan.
When Not to Refinance
While it seems like there are few downsides, there are situations in which you’re far better off with the mortgage you have. Refinancing doesn’t make sense if:
- You’re not certain how long you’ll be staying in your home. Refinancing has the same costs as your original mortgage, points, lending fees, appraisal fees, credit fees, recording fees, and more. If you pay $3,000 in fees, and your new monthly payment is $125 less than your original mortgage, you’ll need to stay in your home for 24 months to break even.
- Interest rates are only a percentage point lower than what you’re paying. Unless your mortgage is for millions, a point won’t save you much per month, and it’ll take a long time for your new loan to show actual savings.
- You’re trying to get equity out of your home. If you need cash, find another way to get it. Home equity takes a long time to build, and, while you may get a chunk of cash on a refinance, you will also have a bigger loan balance and a lot less equity.
- You’re trying to lower your monthly payment by lengthening the term of your loan. If you have a 15-year mortgage, and a 30-year mortgage is a couple hundred less per month, you’ll still pay thousands more in interest and be burdened with a mortgage for much longer.
- You’re trying to consolidate other debt. You could pay off several high-interest credit cards with your home equity, but that only works once. The next time you’re in debt, you won’t have any home equity left and you’ll have taken on more long-term debt with a refinance, further restricting your cash flow.
Is refinancing a smart choice for you? Contact the real estate professionals at RJ Homes, who are always available to answer your questions and offer their help and expert advice.