Is a Mortgage Refinance Smart for You?
Could you be making your mortgage payments more efficiently? Refinancing may offer you the opportunity to align your mortgage more closely with your broader financial goals. That said, refinancing is a complex decision, and many factors will affect your interest rates and optimal payoff timing. In this piece, we explore some of the considerations you may think about when it comes to refinancing your mortgage.
As is the case with any financial decision, it’s important to consider your personal financial goals before coming to a final decision. When it comes to refinancing your mortgage, one of the best reasons to do so is to lower your interest rate on your existing loan. This can decrease the amount of interest paid and lower your monthly payments, all while increasing the rate at which equity is built. Also with refinancing, homeowners have the option to shorten the term of their mortgage. This strategy will help pay off the home quicker and reduce the amount of interest paid. By doing this, you might expect to make similar or greater monthly payments compared to your current rate. Individuals may find it advantageous to refinance into a fixed rate mortgage if they have adjustable rate mortgages and are expecting a higher rate upon their next rate adjustment.
With interest rates evidently being an important factor, examining the interest rate variables is often a smart place to start for homeowners exploring refinancing. These variables include:
- Credit Score: The better your credit score, the more likely you are to receive lower interest rates. According to Experian, a credit score above 700 is considered good. To better your credit score, be sure to make payments on time and lower your debt to credit ratio.
- Federal Reserve Rates: If the Federal Reserve decides to decrease rates, generally market rates are reduced as well. The Federal Reserve has currently adopted an interest rate range that is advantageous for consumers wanting to refinance.
- Shopping Around: Try comparing rates among mortgage brokers, credit unions, or individual banks. Keep in mind that some lenders offer promotional rates at varying times throughout the year.
- Terms: The longer the term of the mortgage, the more likely you are to find higher interest rates. Shorter term mortgages come with larger monthly payments.
Low rates alone do not necessarily indicate whether a refinance is advantageous, however. The amount of time you plan on living in your current home and the closing costs are also important factors. If projected time in your house is short, the closing costs may consume any savings from a refinance.
The choice between longer-term mortgages (typically 30 years) and shorter-term mortgages (typically 15 years) involves a number of tradeoffs and some strategic possibilities. While longer-term mortgages will have a slightly higher rate of interest than their shorter-term cousins, they also have smaller payments because they’re amortized over a longer period of time. Those smaller payments free up additional cash flow that can be used to pay down higher cost debt or increase retirement savings. This can also be done in sequence, using the extra cash flow to first pay down credit card balances and then later increase retirement plan contributions, perhaps taking fuller advantage of employer provided matching funds. While it’s true that more interest will ultimately be paid over the longer borrowing period, this is offset by the fact that the after-tax cost of mortgage interest is typically much lower than the expected return on investments. That difference can add up to big bucks by the time retirement arrives due to the effect of compounding returns.
Refinancing is not the optimal strategy for all consumers and, in many cases, homeowners may be better off sticking with their existing loan. However, there are many circumstances where one could benefit from using this financial tool. Whether you want to lower interest rates, shorten your loan term, transition from a variable rate to a fixed rate, or lower your monthly mortgage payments, do not do it alone. We at Yeske Buie want to partner with you to navigate you through this process. Through conversation and planning, we can work together to ensure your financial goals align with the refinancing strategy that will best serve you. Please reach out to any member of the Financial Planning Team for assistance assessing your current mortgage.