When NOT to Refinance
Rates are low and we keep hearing it is a great time to refinance, and it is! But, it might not be for everyone. Contact me if you want to refinance but don’t know where to start or if it is worth it for you. I am happy to help!
Refinancing costs money: closing costs vary by location but average 2% to 3%, or $4,000 to $6,000 on a $200,000 loan. Even a “no-cost” refinance costs money you pay through a higher interest rate, a larger loan balance or the payment of discount points.
If you’re refinancing to lower your payments, you can do a simple calculation to determine how long it will take you to recoup the closing costs on your loan. For example, if your refinance costs $2000 and your monthly savings are $150 per month, it will take you a little over 13 months before you’ve recouped your costs and truly are saving money.
Realtor.com has a great refinance calculator tool that allows you to plug in your details and tells you how much you will save per month as well as over the lifetime of the loan. It is pretty handy. https://www.realtor.com/mortgage/tools/refinance-calculator/
Benefits of Refinancing
Most people want to refinance when interest rates are low, which makes sense. So, they can pay less in interest and lower their monthly payments.
Others refinance when their equity has risen and they want to take cash out of the property to make home improvements or pay off high-interest credit card debt.
Refinancing can also be a good choice if you want to reduce your loan term from a 30-year loan to a 10-, 5- or 20-year loan in order to pay it off in full faster—although even with lower rates, your payments are likely to be higher because of the shorter timeframe to repay the loan.
Consider Your Loan Terms and Refinancing
If you’re currently financing your home purchase with a 30-year, fixed-rate loan, you should carefully evaluate your payments and your options for refinancing into a shorter term or into another 30-year loan. Typically, it doesn’t make a lot of sense to refinance early in your loan, because initially your payments are mostly interest and you will not have paid down the principal balance.
If you’ve been paying your loan for 7 or 8 years, your loan balance will be lower. If your goal is to lower your monthly payments, you’ll benefit by both lower mortgage rates and financing a smaller amount of money. However, by extending the loan term for another 30 years, you may end up paying more in interest over the life of the loan, since you’re essentially paying interest on the house for 37 or 38 years instead of the original 30-year term.
If you want to pay off your loan faster, you should compare the payments on a shorter term loan to see if you can comfortably afford the payments. Interest rates are lower on shorter term loans, which can offset the accelerated payoff pace.
Think About Your Future Plans
Refinancing makes the most sense if you plan to stay in your home for a few years because if you’re selling soon, you may not recoup the cost of the refinance. However, there are always exceptions to the rule. For example, if you know you’ll sell in 3 years, a refinance into an ARM (adjustable rate mortgage) with a low, fixed interest rate for 5 years could be a smart decision.
Do you want to refinance but don’t know where to start? Or, not sure it is the right decision for you? Contact me Info@SwainSells.com/ 215.757.7257. Use me as your real estate resource. I am happy to help.