With the Fed recently raising interest rates, people have already started to write and call me about whether or not it is still a good time to refinance. You will likely see more offers from your current mortgage company, broker, or bank looking to get you locked in before the Fed raises rates again in 2017. Here are my smart money moves to five key points to know when you make a final decision about whether a refinance is good for your property.
- There Is NO Rule Of Thumb — I love these random articles out there that say your mortgage rates needs to be down by a certain percentage for a refinance to make sense. In fact, Investopedia recently wrote, “The typical rule of thumb is that if you can reduce your current interest rate by 0.75-1%” This makes very little sense to me as this is going to be a math equation because all refinancing costs money. What you are ultimately trying to figure how is the following:
- How much is this going to cost me?
- How long will it take me to breakeven?
- How long will I live in this home?
- Keep A Close Eye On The Costs – Typically, a refinance is going to require that you pay closing costs up front which can be in the ballpark of 2% to 4% of your loan. If that number gets on the high side of 4%, or even get as high as five percent you’ll have to determine if you actually got the right lender. Some lenders will tell you there are ‘no closing costs’, but that doesn’t mean NO cost. Instead of you coming out of pocket with the closing cost money they may ‘roll’ those closing costs into the new mortgage which could make your breakeven time longer.
- Consider Carefully How Long You Will Live In The Home – There are many different types of mortgages to choose from when you do a refinance. You could choose an adjustable rate mortgage, a fixed 30 year, a fixed 15 year, or a convertible mortgage such as a 7/1 (7 year fixed and then it becomes adjustable). While you may not always 100% know when you will move, having a good gauge on how long you will live in the house should help determine the outcome of the kind of mortgage you take.
- Be Careful About Extending Your Time Frame Into Retirement – I have often see people become oblivious to the fact that if you refinance for 30 years, you are actually starting a new 30 year time frame for a mortgage. While you might convince yourself you will pay off the mortgage sooner than the 30 years, if you refinance your mortgage in your 40’s or 50’s, it may extend your time frame to actually retire because you have to carry that mortgage into retirement.
- Say Bye-Bye To PMI – Since there are a good handful of people who have to carry PMI (Private Mortgage Insurance) because they do not put a down payment of 20% when they buy a home, PMI can be an extra insurance cost you carry for years to give your lender security. However, since real estate in most areas of the country have done well over the past 8 years, you might be able to cancel your PMI because you now have “20% equity” in your property.
