Financial Planning – Should I Refinance My Mortgage?

Financial Advisor Financial Planning February 28, 2016 Author: Woody Derricks

Although mortgage rates jumped in December after the Fed’s rate increase, they have come down since the beginning of the year. According to, current rates for thirty-year mortgages are 3.87% nationally (rates posted online as of 3/9/2016). While you may have a low rate on your current mortgage, you may want to consider evaluating your refinance options to lock in potentially lower rates.

How do I know if a refinance makes sense for me? The most common reason to refinance is to reduce your monthly mortgage payment. Even with the fees paid to your lender, a large enough decrease in your interest rate could reduce your monthly payment.

Another popular reason to refinance is to shorten the term of your loan. You may be five or ten years into a thirty-year mortgage and find that a refinance could keep your payment the same while allowing you to pay off your mortgage in fifteen years. Fifteen-year interest rates are often lower than thirty-year rates.

And if you took out an “ARM” or interest-only loan, your mortgage could be ready to reset to a new interest rate and monthly payment. Even if interest rates are lower today than when you took out the loan, the rate could still increase on your loan over time and increase in your monthly payment. You may decide to lock-in these low interest rates with a permanent loan rather than finding yourself at the mercy of potential rate increases over the next 20-25 years.

What should I watch out for? First, make sure you’re focused on the APR (Annual Percentage Rate) and not the “rate.” The interest rate only shows the base rate that you’re paying for the loan. The APR shows the total cost for the loan including any fees assessed and is a more accurate measurement of your cost.

Second, remember that when you refinance, you’re likely extending the term of your mortgage. You may have already paid on your mortgage for five or more years, so spreading the balance of your mortgage over a new thirty-year time frame may cost you. Even if you reduce your monthly payments today, you may be increasing the total interest that you’ll pay over the life of your loan.

Third, if you plan to move in a few years, the cost to refinance may outweigh the benefit of obtaining a lower interest rate. Determine how long you plan to stay at your current residence and then compare the mortgage balance for your current loan against the estimated balance of the new loan.

Remember that times have changed since you last took out a mortgage. Banks have become more selective with their potential mortgage customers. Also, the value of your home has likely declined. If you’re equity in the house is less than 20%, the bank will want to add insurance onto your monthly payment. This will be an added cost to you and could make the new total mortgage payment higher than your current payment.

If you decide to refinance, act sooner rather than later. As the economy improves, interest rates will likely increase. Even a small increase could dilute the benefit for refinancing your mortgage. Talk with your financial advisor, tax advisor, and mortgage professional to determine what is best for you.

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