When it comes to making major decisions there are generally some pros and cons to consider. Today I’m addressing 3 reasons why refinancing your home loan would be a good idea and 3 reasons why it might not be right for you.
Despite interest rates continuing to be low, the Mortgage Bankers Association recently conducted a survey of all mortgage applications and found that only about 53.8% of total applications were for refinancing.
For those still debating whether or not they should refinance, here are 3 reasons why it might be the right move for you:
1. You would like to reduce your term.
If you’ve been making payments on a 30-year loan, it might be worth looking into options for shortening the term to a 15-year loan. In many cases, 15-year interest rates are more favorable since you are committing to pay the loan off sooner. A 15-year loan is typically the best way to pay off your loan quickly and you pay less in interest over the life of the loan.
2. You would like to lower your rate.
One of the most common reasons to refinance a home loan is if you originally financed at a much higher rate than what is now available today. This doesn’t mean you should monitor interest rates and refinance at every available opportunity because repeatedly paying closing costs may not be beneficial to you.
However, if you haven’t refinanced in a while, discussing the current rates with Alissa Samia Alvarez will only take a few minutes of your time, and may save you thousands over the course of your loan and possibly free up substantial dollars in your monthly budgeting.
3. You would like to switch from an adjustable rate mortgage to a fixed rate.
Although much less popular now, adjustable rate mortgage loans were once a popular option when interest rates were pushing double digits. Many homeowners were attracted to the initially low rates, which were tied to the prime interest rate. But as the prime rate went up, so did the monthly home loan payments.
In today’s historically low interest rate environment, locking into a fixed rate from an adjustable rate could provide you with payment certainty.
While refinancing can be a help for many, it is not always a good financial move. Here are 3 reasons why not to refinance:
1. You’ve had your mortgage for a long time.
The amortization chart below created by the Federal Reserve Board shows that the amount of your payment that is credited to the principal of your loan increases each year, while the amount credited to the interest decreases each year. If you’ve had your mortgage for a long time, you are at the stage when more of your payment applies to principal and helps build your equity. If you were to refinance late in your mortgage period, you will restart the process all over and most of your monthly payment will again be credited to paying interest and not to building equity.
Amortization of a $200,000 loan for 30 years at 5.9%
2. You may incur a prepayment penalty.
A prepayment penalty is a fee that a lender may charge if you pay off your mortgage loan early, including refinancing. Be sure to carefully consider the costs of any prepayment penalty against the savings you expect to gain from refinancing. Paying a prepayment penalty will increase the time it will take to break even, when you account for the costs of the refinance and the monthly savings you expect to gain. If you are refinancing with the same lender, you may want to ask if any prepayment penalty can be waived.
3. You are going to move in the next few years.
The monthly savings you would gain from lower monthly payments after a refinance may not exceed the actual costs of refinancing. Use this break-even calculation to help determine whether it is worthwhile to refinance now based on the date of any anticipated change of residence.
As always, I’m here for help. I love answering questions specific to your situation and will guide you to the best decision for your family after we weigh the pros and cons together. Call me anytime at (562) 972-0351.
Source: Housing Wire and Federal Reserve Board