CHRIS THORNBURGH

Chris Thornburgh

Mortgage refinancing is trending right now, but how do you know if it’s right for you? Thanks to low interest rates, refinancing your mortgage can save you money but not in every situation. Before you join the race to refinance, there are a number of factors to consider. Let’s look at a few.

CLOSING COSTS

When it comes to costs, there are two important things to know. First, refinancing has nearly as many costs as your initial mortgage. Beware of “no closing cost” loans if you are trying to reduce your monthly payments. Lenders likely recoup those fees by giving you a higher interest rate, thus defeating your goal.

The second thing to understand is that closing costs vary according to your interest rate. If you want the lowest available rate, closing costs will be higher. Closing cost are typically lower if you accept a slightly higher rate. It’s important to determine if the refinance costs can be recouped from a lower interest rate.

CURRENT INTEREST RATE

Buyers who took on mortgages in 2018 are prime candidates for a refinance, though they may not be paying attention. Borrowers who didn’t take advantage of the low rates from 2014 to 2017 may also find it financially feasible to refinance.

Generally speaking, if you can shave off at least a half point to three-quarters of a percentage point, refinancing is worth checking out. That said, consider how long it will take you to recoup refinance costs. For example, if you paid $4,000 to refinance your mortgage to a lower rate and your payment dropped by $180 per month, it will take you just under two years to break even.

LENGTH OF TIME IN THE HOME

This is important in terms of recovering closing costs before you move. If you aren’t planning to be in your home for at least two years, it’s probably not worth refinancing. In some cases it still makes sense if you refinance from a very high rate to a much lower one, or if you trade out-of-pocket closing costs for a higher interest rate that is still lower than your original rate.

LENGTH OF LOAN

Many people refinance over and over again into a 30-year loan. At that rate, the loan will never get paid off. Request a loan term no longer than the number of years remaining on your original mortgage, if you can afford it. This allows you to pay off your mortgage on schedule with a lower rate. Check out refinancing into a shorter-term loan with an even better rate. It may only slightly raise your payment.

EQUITY

Equity gives you options. If your loan-to-value is now under 80 percent and you are still paying for private mortgage insurance, refinancing may make sense if your lender will not remove it.

Equity also gives you the ability to do a cash-out refinance if you need money. It’s not uncommon to see folks use their equity to pay off high-interest debt, finance home improvements, or to cover the cost of a child’s college education. If you are considering a cash-out refinance to pay off credit cards, for example, take caution. You are mortgaging your home with what used to be unsecured debt. Also know that the related interest is no longer deductible. New tax rules get complex on cash-out refinances, so it is wise to seek the advice of a tax professional to confirm that it makes sense.

THE BOTTOM LINE

Refinancing your mortgage into a lower rate is often a good idea. Before moving forward, review your situation with a professional to avoid financial missteps.

Chris Thornburgh is a certified public accountant. Contact her at cthornburghcpa@gmail.com. The views expressed are her own.

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