Question: should home mortgages be refinanced if you can get a better interest rate
Are you considering refinancing your mortgage because interest rates have fallen? When mortgage rates decline, many homeowners pay off the existing mortgage loan and substitute it with a new one. Other than better interest rates, the following are the other reasons for mortgage refinancing: to shorten the mortgage period, to convert it from an adjustable to a fixed rate, to take advantage of home equity to finance larger home purchases, and to consolidate debt.
However, before shopping around for the lowest interest rates, it is crucial to know that mortgage refinancing comes at a price. If you are not keen, it might take more than a decade to recover the upfront costs. You should only consider refinancing your mortgage if it will save you good money in the end. In other words, your decision should be governed by financial prudence. There is no need to gamble with matters to do with finance. Many individuals have rushed into refinancing, only to realise much later that they had robbed Peter to pay Paul.
So how can you make a sound decision that you will never regret? Well, handling financial matters sometimes requires taking risks. But you can still make the best decision. In this blog, we are going to discuss in detail the issue of refinancing mortgages.
Specifically, we will be responding to the question – should the home mortgage be refinanced if you can get a better interest? Let us see.
Factors to consider before mortgage refinancing
Before refinancing your mortgage, ask yourself the following questions:
- Will you recoup your investment back?
- How long are you planning to live in your house?
- Will you lose your potential savings?
- Do you have other financial goals?
- What is the cost of private mortgage insurance?
Will you regain your investment?
Securing a lower interest rate on a mortgage involves some expenses. Examples of these expenses are appraisal fees, bank charges, and legal fees. Cumulatively, these costs can add up to 3% of your overall mortgage balance. However, the percentage of closing costs slightly varies with time. For example, you can pay closing costs of up to $6,000 on a $300,000 mortgage. After calculating the aggregate costs of refinancing, you need to determine the period it would take to recoup the money back. A good refinancing plan should not take you more than five years to recover the costs.
For instance, if you have been paying an interest of 4.5% on a 30-year mortgage for ten years, and you have already cleared $80,000 of the remaining loan, then expect to pay roughly $2,026 monthly on the remaining mortgage balance. However, if you can afford a 3.75% interest on the remaining 20-year loan, your payment per month will reduce to $1,897, thus saving close to $130 every month. This implies you would take less than four years to recover $6,000 cost of mortgage refinance.
How long are you expecting to stay in your house?
Why incur refinancing costs if you don’t anticipate to live in the home long enough to recover your costs? It would be best if you asked your lender to help you do a break-even analysis to determine the time when your savings will outweigh the refinancing costs. If you expect to be in the house at the break-even point, there is no need for mortgage refinancing.
Are you likely to lose your potential savings?
If the additional interest costs of refinancing your mortgage will make you lose your potential savings, then it is not worthwhile. Remember, you are likely to go back to the beginning and pay total interest if you decide to substitute your current 30-year mortgage that you took five years ago with a new 30-year mortgage. However, refinancing into a shorter-term house loan is not necessarily a better idea. Shorter-term mortgages attract higher monthly payments. These conflicts with the primary objective of mortgage refinancing-to save on monthly payments.
If you want to pay off your mortgage quicker, go for a 30-year fixed-rate and you will be surprised how quickly you can get out of it. A long-term loan may seem to accumulate a huge total interest. However, long-term mortgages enable you to save so much that you can raise your periodic principal payments, thus paying off the loan quicker.
Do you have other financial goals?
There is no need to use your effort, money, and time to refinance your mortgage only for lifestyle inflation to eat away those savings. Plan how you intend to use your newfound savings. It is wise to consider your other goals. When you intend to alter your monthly expenses, factor in progress in your other objectives, for example, saving for retirement, education, or a wedding. There is no need to deny funding to all your other essential life projects just because you want to accumulate funds to pay for additional costs of refinancing your mortgage.
Private mortgage insurance
Also, you have to cover the cost of private mortgage insurance if your equity in the house is not more than 20%. This will not make a huge change to you if you are already paying private mortgage insurance under your existing mortgage. However, if your home depreciated since the acquisition date, you will be asked to start paying the private mortgage insurance. A fall in the mortgage interest rate may not be satisfactory enough to counterbalance the extra cost of PMI.
The bottom line
Attractive interest rates can make you save a lot of money when you refinance your mortgage. Mortgage refinancing may decrease your mortgage duration, help you build equity more rapidly, and diminish your loan settlement. However, other considerations might outweigh the benefits accrued when you refinance your mortgage because of better interest rates. Ensure you have enough savings to cover for contingencies such as relocation to other areas, unexpected home repair, job loss, or death before you decide to pay additional refinancing expenses and cost of the private mortgage insurance. In case you need instant cash, you may check licensed money lender singapore review and get a quote.
