“Rates are so low right now!” is a phrase that you’ve likely heard more than a few times over the past few years. It seems that every time we think rates can’t get any lower—they do. If you already have a mortgage, how do you know if you should refinance or not? In this article, we’ll explore four reasons why refinancing may be right for you.
Reason #1: You Want to Lower Your Interest Rate
If the rate you have now is higher than rates currently being offered, then it may make sense to refinance your current mortgage. Even a half a percentage point has the potential to save you hundreds of dollars each month off your mortgage payment.
However, it’s also important to weigh the potential costs of a refinance with the savings you’ll see. This is called computing your break-even analysis. If you’re likely to sell your home before you start to see real savings, it may be worth it to hold off.
What does this mean? Let’s take an example:
Let’s say refinancing is going to save you $200 per month, but it’s going to cost you $4,800 to complete the refinance. This means you don’t actually break even on your refinance until after 24 months ($4,800 / $200 = 24). If you plan on staying in your home for five more years, you’ll net a total of $7,200 in savings in that time by refinancing!
Reason #2: You Want to Convert from an Adjustable Rate to a Fixed Rate
Adjustable rate mortgages work like this: they are fixed for a set period of time and then adjust annually based on an index. So, if you have a 5/1 ARM (Adjustable Rate Mortgage), it will be fixed for five years and then adjust every one year after that.
ARMs can be a great option if you think you’ll sell your home before your rate starts to adjust because the initial fixed rate is often lower. However, as rates start to increase and you enter into the adjustable period of your loan, it can lead to a lot of uncertainty about how much your payment will be each year.
Refinancing into a fixed-rate loan when rates are low can lead to peace of mind as your payment will be the same for the entire life of the loan.
Reason #3: You Want to Consolidate Other Debt
Another great way to take advantage of lower interest rates is by consolidating other debt into one loan. If you have enough equity in your home, we may be able to tap into this equity to consolidate your current loans into a single lower monthly payment.
This is especially advantageous for two reasons: lower payments and tax benefits. Let’s say you have a personal loan, student loan, auto loan, or other type of loan that has a high interest rate—higher than your potential new mortgage. You can “roll” this loan into your mortgage and take advantage of your new mortgage’s lower rate. Your current loan will be paid off and you’ll have a new loan with one payment.
As an added bonus, mortgage interest is often tax deductible, so you’ll potentially save even more money on your taxes as well.
Reason #4: You Want to Make Improvements or an Investment
Another wise way to use your home’s equity is to make improvements to your existing home or to buy an investment property. With a cash-out refinance, you gain access to use your home’s equity now.
It is important to consider how your cash will be used with a cash-out refinance. For example, you want to make sure the improvements you are making will increase the value of your home, otherwise you’re using good money for a bad project. We recommend checking out Remodeling.com’s Cost vs. Value Report to see what projects add value to homes in our area.
The same is true for an investment property. Make sure that any property you invest in will add to your overall financial health. You should always make sure an investment property will cash flow and will increase in value in the coming years.
Rates continue to surprise us, and the time has quite literally never been better to refinance your current mortgage. Every situation is different so if you would like a detailed analysis on whether or not it’s a good time for you to refinance, please reach out today!