Answer these 5 questions to determine if refinancing makes financial sense
BY: KENNY BROWN, Jr. Vice President / Business Development, AmeriTrust
& LAURIE SAINT, CPA® Assistant Vice President / Financial Planning, AmeriTrust Investment Advisors
Laurie Saint
Kenny Brown
Mortgage rates have taken another dip and it may have you wondering if now is a good time to consider refinancing your mortgage. Today’s rates, which are around 4 percent, are low by historical standards. According to home ownership analytics firm Black Knight, more than 6.8 million homeowners could save money by refinancing now.
There are several important considerations to review when determining if you should refinance. These include your current mortgage interest rate, credit score, lender and loan amount. It’s also critical to factor in closing costs, which include credit fees, appraisal fees, points (fees paid to a lender at closing for a lower interest rate), insurance and taxes, escrow and title fees and lender fees.
While every person’s situation is unique, here are five questions to answer to determine if you should refinance:
1. What is your goal?
For example, are you interested in changing the terms of your mortgage to pay off the balance more quickly or do you want to take out equity for home improvements? It may or may not make sense to refinance your mortgage depending on your goal. The savings from refinancing should be enough to recover the closing costs within 18 months to justify refinancing your mortgage. Planning to pay off credit card debt with equity from your home also may make financial sense. However, if you continue to have a substantial balance every month, then I would advise against using a home line of credit or mortgage refinancing to pay off your credit card debt. Knowing your behavior and working with advisor who keeps this in mind when establishing your goals is important.
2. How do I evaluate the cost?
The most important consideration when evaluating cost saving is the interest rate you are paying on the current loan versus the new mortgage. The cost of borrowing is impacted by many factors, including your FICO score, which looks at the history of when you received credit, the amount of credit you have outstanding, how much of that credit have you used and whether or not you have paid that credit back on time. This is the score lenders use to determine your creditworthiness. If your FICO score has decreased, then you may not be able to take advantage of prevailing lower rates and could receive a higher rate than what you currently have.
Unfortunately, it can be expensive to refinance, but you can make a more informed decision by simply asking your lender to run a break-even analysis to better understand how long it will take for the monthly savings to recover the costs to refinance. Do not forget to negotiate refinance costs. You may be able to have the mortgage company waive the appraisal fee or other miscellaneous expenses, which could reduce the benefit of refinancing.
3. Is a life-changing event anticipated?
Next, consider if the break-even point will occur during the time you expect to be living in your home. It is unlikely to be worth the cost to refinance if you’re planning to move before getting to your break-even point. According to the data collected from a 2018 US Census questionnaire, the top five reasons why Americans move are: 1.) they want a new or better home/apartment; 2.) they want to own their home; 3.) other family reason; 4.) new job or job transfer; and 5.) they want less expensive housing.
4. How are the mortgage terms changing?
Are your rates fixed versus a variable rate? A variable rate introduces an element of the unknown if interest rates go up at a time when your financial picture may have changed and you may no longer afford your mortgage payment. Rather than refinance your mortgage, one option may be to simply shorten the number of repayment years. You may also be able to save the cost of refinancing by setting up bi-monthly payments with the mortgage company.
5. How many years remain on the unpaid balance?
Under current tax law, with the increase in the standard deduction advisors may encourage their clients to pay down their mortgage. However, if the terms of your mortgage are considered long-term (10 years or more), tax law reform that is ending in 2025 – which provided us with a much lower tax rate – could change, which may negatively affect the refinancing decision. Tax laws change and it has a direct impact to the cost/benefit of refinancing your mortgage.
There are many variables that must be considered, and every situation will depend on your individual set of circumstances. But if you work with a financial advisor and answer these questions, you’ll be in a much better position to make the right decision.
