It seems like everyone has an opinion on how far rates have to drop before it make sense to refinance. It’s time to stop following water cooler gossip.
NNNNOOOOO!!!!!! Please don’t tell me my mother was wrong!
Well, in the famous words of Billy Joel, “You may be wrong for all I know, but you may be right.”
There really isn’t a magic equation to this. Susquehanna offers an online calculator that can help you run the numbers to determine how long it will take to break even on a refinance. However, there are other factors that come into play. Here are some key questions to consider.
Why am I thinking about refinancing?
“Because rates are low” is not an acceptable answer. Are you looking to consolidate higher-interest debt? Are you currently on an adjustable rate mortgage and looking to lock into a fixed? Are you looking to knock 10 years off your term? Are you looking to reduce your monthly housing expense?
How long have I had my existing mortgage?
This is counter-intuitive, but to some extent, the shorter you have had the existing mortgage, the less rates have to drop for refinancing to make sense. Why? Because in the beginning stages of an amortizing mortgage, the majority of your payments are going toward the interest and very little going to the principal. So if you’ve had your current loan for 15 years, a good portion of your total payment is now going toward principal and it may not make sense to refinance.
How long do I plan on keeping this mortgage?
Notice I didn’t ask, how long do you plan on living in the home? With real estate markets a little more flat, it is not uncommon that today’s primary residence becomes tomorrow’s investment property, so the mortgage may outlast how long you actually live in the property.
What other debts do I have?
If you have debt besides your mortgage (car loans, student loans, personal loans, credit cards, home equity loans, etc.) you should decide if it makes sense to pay this off with the proceeds of a refinance. The amount of other debts you can consolidate into the new mortgage will be dependent on the equity in your home. However, with fixed-rate mortgages in the low to mid 4’s, it is pretty likely the interest rate on the other debt is higher right now, so you may have the opportunity for huge savings.
Do I have any major expenses coming up over the next 3-5 years?
If you know that you will have a major expense to finance (children going to college or getting married, purchasing a new car, major home renovation), then consider whether is makes sense to borrow that money now and put it in a “rainy day” fund for a predictable future expense.
Once you’ve answered these questions, contact a professional mortgage advisor who can review your financial strategy and objectives to find out if refinancing is right for you.
Oh, and give your mother a call. She deserves it—whether she was right or wrong.