Mortgage refinances (or “refis”) are on the rise again as rates continue to drop to near all-time lows. At the time of this blog post, 30-year fixed rate loans are hovering in the mid-3% range. There are a variety of reasons to consider refinancing including: lowering your interest rate, reducing your monthly payment, accessing equity in your home to fund a project or consolidate debt, shorten the term, change from an adjustable rate to a fixed rate, or to eliminate private mortgage insurance premiums. For most, the primary reason is to reduce the interest rate. Conventional wisdom used to suggest waiting until you can reduce your existing mortgage rate by 1 to 2%; however, today we have seen cases that even a ½% rate cut can increase a financial position. If your mortgage rate begins with a 4 or higher, or if you have an adjustable rate mortgage, you would be a prime candidate to at least explore a refinance.
While the reasons differ, it is important to consider the overall cost involved with a refi to ensure you can recoup this while you retain the loan. If you’re planning on selling your home or foresee a life change that may force you to sell, you may think twice before incurring the refinance cost. The easiest way to help decide whether or not to refinance is to consider the breakeven point — the point at which you recoup the refinance cost by the monthly savings with your new mortgage payment. For example, let’s say you have $3,600 in total closing costs and your new payment would be $150 lower. That means within 24 months ($3,600 / $150), you would reach the breakeven point and anything beyond that is icing on the cake so to speak. We have also seen cases lately where individuals have been able to refinance to a lower rate with $0 closing costs. It is important to weigh both options as paying some closing costs generally means an even lower rate.
Keep in mind, similar to initial financing, a refinance requires you go through several steps, such as an official underwriting process from lenders that generally includes a credit report check, an appraisal of the home, title history review, as well as a detailed review of personal financial documents, to name a few. From start to finish the process can take several weeks – so best to start the process early. Generally, you can lock in your interest rate once you’re far enough along in the process if you decide to do so. While interest rates could continue lower, we feel it’s best to take advantage of rates today than potentially miss an opportunity. Alternatively, for those looking to buy a home you might consider moving up your timeline to lock in this favorable rate environment. With any financial transaction, it’s important to shop around and ideally use a mortgage broker who can shop rates on your behalf.
If you have questions or are curious if you may be a good candidate for a refinance, please reach out to your JNBA Team.
Please note JNBA is neither a mortgage broker nor real estate specialist. It is important to discuss refinancing details with the mortgage broker and/or real estate specialist of your choosing. JNBA is not an accountant and no portion of the above should be construed as accounting advice. All accounting issues should be addressed with an accounting professional of your choosing.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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