Should You Refinance Your Mortgage?
Although mortgage rates jumped in December after the Fed’s rate increase, they have come down since the beginning of the year. According to BankRate.com, current rates for thirty-year mortgages are 3.85% nationally (rates posted online as of 2/17/2016). 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?
There are several reasons why someone would want to refinance their mortgage. The first, and most common, is to reduce your monthly payment. Even with the fees paid to your lender, a large enough decrease in your interest rate could reduce your monthly mortgage payment. That reduction could then be used for paying off other debt, saving for the future, or to increase your monthly disposable income.
Another popular reason for refinancing 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. Often fifteen-year interest rates will be lower than those offered for thirty-year mortgages which could allow you to dramatically reduce the interest you’re paying to the bank.
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 interest rate could still increase on your loan. The obvious impact of this would be an increase in your monthly mortgage payment. Also, you may decide that you want to lock-in these low interest rates rather than finding yourself at the mercy of potential rate increases over the next 20-25 years. If you refinance, you’ll lock-in today’s rates and likely either reduce your payment or the time required to pay off your mortgage (as described above).
What type and term of loan should I choose?
If you decide to refinance, you’ll have the option of selecting an ARM or permanent loan and the length of the loan. With an ARM, you have a certain amount of time (usually 3, 5, or 7 years) with a locked-in, lower interest rate. After the locked-in period ends, the rate then resets annually for the balance of the thirty-year term. With a permanent loan, you’re paying the same rate and monthly payment for the entire loan term.
When selecting a permanent loan, you can typically choose from a fifteen or thirty-year period to pay off your mortgage. The fifteen-year loan often has a lower interest rate than the thirty-year loan and allows you to pay off the mortgage in half the time. The drawback to this term is that your monthly payment will be higher than it would for a thirty-year.
I often recommend to my clients that they go with the thirty-year unless their current loan only has 20 years or less remaining. This is due to the size of their monthly mortgage obligation and is especially true of interest rates where the fifteen and thirty-year loans are comparable. You can pay down a thirty-year loan faster by making larger payments, but you can’t scale back your payments on a fifteen-year mortgage if you go through a financial crisis (disability, divorce, loss of employment, etc).
What should I watch out for?
While rates may be low, refinancing isn’t for everyone. Make sure that you’re carefully evaluating what makes sense for you. First, as you compare rates, make sure you’re focused on APR not the “rate.” The interest rate only shows the base rate that you’re paying for the loan. APR is the annual percentage rate. APR shows you your total cost for the loan. This includes any fees that may have been assessed during your refinance. The APR is the 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, determine how long you plan to stay at your current residence. If you plan to move in a few years, the cost to refinance may outweigh the benefit of obtaining a lower interest rate. After you decide how long you’ll stay at your home, you can compare the mortgage balance for your current loan against the estimated balance of the new loan. You can then determine which loan is more advantageous for you.
Remember that times have changed since you last took out a mortgage. Banks have become more selective with their potential mortgage customers. Someone who could easily have received a loan five years ago may no longer qualify for a loan. 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. Interest rates this low won’t last long. 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.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
Woody will be out of the office for the day, but reachable by email. His assistant, Angela, will be in the office from 8:30am to 3pm. If you have an urgent matter outside of those hours, LPL Financial can be reached at 800-558-7567.
March 21st through March 24th: Woody will be out of the office while traveling to meet clients. He will be reachable by email and the office phones will forward to his cell on Wednesday the 23rd and Thursday the 24th. His assistant, Angela Hartman, will be in the office from 8:30am to 4:30pm on Monday the 21st, Tuesday the 22nd, and Thursday the 24th. If you have an urgent matter outside of those hours, LPL Financial can be reached at 800-558-7567.
Our office, the markets, and LPL Financial will be closed for Good Friday.
Woody will be out of the office for the day, but reachable by email. His assistant, Angela, will be in the office from 8:30am to 4:30pm. If you have an urgent matter outside of those hours, LPL Financial can be reached at 800-558-7567.
Just a reminder …
We are always accepting donations for the local animal shelters – toys, tennis balls, collars, leashes, food, cat litter, cardboard trays, office supplies, cleaning supplies, towels, mats, washcloths, etc. We will accept donations Monday-Friday between 9AM & 5PM.
Elise thoroughly enjoyed the holidays. She LOVES the Highlandtown Train Garden, was fascinated by all of the lights and Christmas trees, and did a much better job of opening her gifts this year than last. December is getting to be a bit more enjoyable as we watch our little girl take in Christmas.
Elise has also brought on a change of pace for New Year’s Eve. For the past two years, we’ve been having a quiet dinner out followed by a restful evening at home. This might be the first year since we started dating that Heidi went to bed before me and neither of us made it to midnight. It appears as though Elise has domesticated us.