Should You Refinance Your Home Mortgage?
As much as refinancing may bring savings by lowering your monthly payment, it also has costs to be considered.
Housing costs are one of the largest components of most household budgets. Interest rates change from time to time, and it may save you money to refinance at the current rate. But there's more to the decision than knowing interest rates are lower.
To determine whether you should consider refinancing, you need to compare the costs of obtaining a new mortgage with the savings you will enjoy with a reduced interest rate. You my also want to consider refinancing to a different type of mortgage, such as switching from a 5-year balloon to a 15-year fixed rate mortgage.
Rick and Carol's Example:
Rick and Carol have a home they bought three years ago for $300,000 and they have five years remaining on a balloon mortgage of $200,000 with an interest rate of 4.25%. Their monthly payments are $983.88. They intend to live in their home for several years and would like to lock in a 30-year mortgage with a 3.5% fixed rate.
If Rick and Carol decided to refinance, they would incur the following costs:
|New Mortgage Costs|
|Discount points (in $)||$ -|
|Origination points (if any)||$ 1,500|
|Application fee||$ 475|
|Credit check fee||$ -|
|Attorney fees (yours)||$ -|
|Attorney fees (lender's)||$ -|
|Title search fee||$ -|
|Title insurance fee||$ -|
|Appraisal fee||$ -|
|Local fees (taxes, transfers)||$ -|
|Other fees||$ 360|
|Total cost of new mortgage||$2,335|
Lowering their interest rate, however, could result in the following savings:
|Calculating the Savings|
|Monthly payment on current mortgage||$983.88|
|Monthly payment on new mortgage||$898.09|
|Difference between two mortgage payments||$85.79|
|Divide total fees on new mortgage by monthly savings
- This is the number of months to recover your costs.
When reviewing the feasibility of refinancing, you may also wish to consider refinancing a larger or smaller amount than the current balance of your mortgage. If you have excess funds available and believe you will have a hard time earning a return greater than the mortgage rate, you may want to pay down your mortgage and get a new mortgage that is smaller. If you have other liquidity needs, you may want to refinance a larger amount to free up some of the equity in your home.
Remember that mortgage interest is tax deductible if you itemize your deductions on your tax return. Consult your tax advisor to see how this may apply to your situation.
No interest rate environment lasts forever. Unfortunately there is no crystal ball that will tell you when rates have reached their lowest level. Taking action now to evaluate whether refinancing now makes economic sense can help you be in control of one of your largest household expenses.