Much like buying a new home or taking out a mortgage, refinancing your home mortgage is not something to take lightly. You should put a lot of consideration into this decision because it’s going to affect your wallet.
Here are some questions you should ask yourself before you take this big step.
What are Your Goals in Refinancing Your Mortgage?
This is the first question you should grapple with. There are several reasons you might want to refinance your mortgage.
- Reducing your interest rate: If your credit score has improved since you took out your first mortgage or if market conditions are more favorable, refinancing your mortgage can reduce your interest rate — and lower interest rates usually mean lower monthly payments.
- Resetting the clock: If you have a 30-year mortgage, you can essentially reset the clock by refinancing to another 30-year mortgage. This allows you more time to pay it off.
- Reducing the clock: Alternatively, you can refinance from a 30-year mortgage to a 15-year mortgage to help lower interest rates and pay off your mortgage sooner.
- Consolidating your debt: If you have a mortgage and a home equity loan, or if you took out a second mortgage, you can refinance to consolidate your debt. You’ll know better what to expect when managing just one bill.
- Changing the mortgage type: If you have an adjustable-rate mortgage and the market is not very good, you can end up paying a higher interest rate. In this case, you can refinance to a fixed-rate mortgage so your rate is more stable.
What are the Costs?
The next question to ask yourself is about the costs. Keep in mind that the costs vary by case and by bank, so do some research to learn about what you will have to pay upfront.
- Application fee: This is the cost of processing a loan request and running a credit report.
- Title insurance and title search: A refinanced mortgage counts as a new policy — which you have to pay for. This cost is a buffer for title discrepancies and a fee for ownership verification.
- Attorney review fees: The lender’s attorney charges the lender a fee to close the mortgage, and those fees are usually passed on to you, the borrower.
- Lower interest deduction on taxes: While this is not a cost you have to pay immediately when you refinance your mortgage, keep in mind that a lower interest rate means a lower interest rate deduction come tax season.
What is the Break-Even Point?
The break-even point is just how long will take for your savings to equal the amount of money you spend in refinancing costs. To figure out what this number is, simply divide the total cost of refinancing by the monthly savings. The result is how many months it will take for you to break even.
The break-even point is important because the whole reason you’re refinancing is to save some money. If you plan on moving in a few years, before you even hit the break-even point, refinancing your mortgage is probably not the right decision for you. On the other hand, if your break-even point happens within three years and you aren’t planning on moving for another decade, refinancing could end up saving you a lot of money.
Refinancing your mortgage can be a confusing process, but keeping these three questions in mind will help you stay focused. If you are unclear about home mortgages or refinancing, you don’t have to figure it out alone — our financial advisors can assist you with any questions you may have.