Home ownership comes with fantastic benefits, like building equity in your property and having a place to live that your family can call your own. However, as most homeowners know, owning a home also comes with costs (how about a new furnace, anyone?). That’s why it’s important to find opportunities to save money. In some cases, refinancing your mortgage may help you save on interest. If you’re wondering, “How often should I refinance my mortgage?” we’ve got the answer in this blog post.
Are you looking for a personalized financial plan to help you reach your family’s future goals? We’ve got your back. Schedule a call with Bay Point Wealth today.
What does it mean to refinance your mortgage?
Refinancing a mortgage simply means updating the terms of your current loan for a new loan, which may or may not carry a different interest rate. Although interest rates can change frequently, they’ve generally been at all-time lows over the past decade. Rates did rise to 4.5% in the past year, but they’ve recently dropped again and are now back under 4%.
Why might you want to consider refinancing?
In considering how often you should refinance your home, keep in mind that it almost always makes sense to refinance at a lower rate if:
- you plan on staying in your home, and
- your total loan balance is high enough for the interest savings to be impactful.
While the most common reason people refinance is to get a more favorable interest rate on their home loan, this doesn’t mean refinancing is a good choice solely based on getting a lower rate. Other factors also should play into your decision.
Pro Tip: Recently, mortgage rates have been on the rise (we’re currently seeing rates around 4.125% on a 30-year fixed refinance), but historically speaking, they’re still at great levels. Keep in mind that the interest rate you will be quoted is driven by your income, credit score, overall debt, and a few other factors.
Refinancing carries a cost that ranges between $4,000 and $10,000, due to home inspections, title search fees, escrow account charges, and more. The cost varies by state, and you’ll have to pay it every time you refinance your mortgage. So think carefully about how long you plan to stay in your current home (the average is less than five years).
For example, if you refinanced to lower your interest rate by 1%, you might save roughly $1,600 per year on a $160,000 mortgage. While this seems helpful at a glance, if it costs you $7,000 to refinance and you only own the home for two more years, you’d end up spending $7,000 to save $3,200. You could be better off putting that $7,000 into your 401(k) or IRA (if you’re still working).
In addition, the break-even point will differ depending on the size of your loan. If you’re refinancing from an interest rate of 4% to 3%, that 1% reduction will be a lot more impactful on a $1,000,000 loan versus a $300,000 loan. Or, if refinancing means you save 2.5% on your interest rate and you’re planning to own your current home for years to come, it could be a great option for your family. Everyone’s situation is unique.
Other Reasons To Refinance Your Mortgage
1. Cash-Out Refinancing
A less common avenue is known as a cash-out refinance, which involves taking out a larger mortgage than you currently have on your home. A cash-out refinance might be a good choice if you’ve lived in your house for many years and have been building equity, and perhaps have seen some appreciation in value. If your home is worth $700,000 and you only owe $300,000, you could refinance your current loan and take some additional cash out.
Most people use a cash-out refinance to make improvements on their current property, like adding a deck, rebuilding a garage, and/or remodeling a bathroom. Interest rates on cash-out refinances are usually less favorable than rates for a new home purchase or traditional refinance. However, it can still be worth leveraging this inexpensive capital versus depleting your cash reserves or drawing on a retirement account, which can trigger extra or unnecessary income tax.
2. Updating Your Term
If you have a 15-year loan on your home, you will pay less in mortgage interest over the life of the loan, but your payments will be much higher. Sometimes the flexibility of a 30-year loan with lower payments can make sense, depending on your financial situation. In contrast, refinancing from a 30-year to a 15-year loan when you can afford the switch can save significant money, especially if you plan to stay in your home long term.
3. Paying Off Debt
If you have a high-interest credit card or another personal loan that carries a high interest rate, refinancing your mortgage might be a smart move. Refinancing could enable you to take cash out of your home to pay off higher-interest debt.
Pro Tip: Keep in mind that the mortgage industry in the United States is heavily regulated, and changes happen frequently. This applies not only to refinancing costs, but also to closing requirements. It’s always wise to talk to a professional if you have questions.
3 Tips For Refinancing Your Mortgage
1. Know your full financial picture.
Understanding your family’s complete financial picture (including investments, taxes, and insurance) is key when making decisions about the future. This process includes being aware of all your other total debts, if any, aside from your mortgage. With your financial picture in mind, you can determine if it makes sense to consider a refinance. This is a great question to bring to your financial advisor, who should know your situation and your goals intimately. Think about where you want to be in the next five years before you decide whether to refinance.
2. Shop around for products.
Ask your local credit unions, as well as local and nationwide mortgage lenders, for refinance pricing based on your specific circumstances. This will enable you to get a sense of which product and term will be best for your personal situation. You can even shop around when it comes to closing costs such as title insurance, so don’t hesitate to seek the best deal possible.
3. Calculate the break-even point based on quoted refinance rates.
Make sure you know the true cost of refinancing your mortgage by factoring in the associated fees and how long you plan to stay in your home. To obtain refinancing quotes, your financial advisor may be able to provide investment documents and tax returns to your mortgage broker.. This will take some of the legwork off of your list.
Financial Planning On Your Terms
Depending on your family’s circumstances, a mortgage refinance can be straightforward—or you might need some help. In certain situations it’s critical to have an advisor who can work with your loan officer to make sure your loan gets approved. For example, if you’re retired or between jobs and you’re not earning income, the process requires some extra steps. The loan officer may want to see some ongoing income, so your financial advisor can provide you with a letter to help ensure you qualify for a refinance.
At Bay Point Wealth, we’re well versed in the details of debt and financing. Our experts can offer you trusted guidance so you can be confident in your decision to refinance—or not. We understand refinancing is a personal choice, and we help clients shop around for products regularly because we care about finding the right fit for you. Interested in learning more? Schedule a call with us today.