Refinancing Your Mortgage

With interest rates hovering near historic lows, banks and mortgage lenders have been inundated with calls from homeowners inquiring about the mortgage refinancing process. On its face, the decision to refinance seems fairly straightforward – if you can lower your interest rate and monthly payment, you should do so. Unfortunately, it’s not that simple. While lowering your interest rate three-fourths of a percent or even a full percent is a great reason to refinance, there is often a host of other factors that hold just as much weight. Below are some questions you should consider before deciding to refinance your mortgage.

How will refinancing impact your amortization schedule? Refinancing (even at a lower rate) restarts the amortization process. As a result, you may end up paying more interest cumulatively over the course of the loan. You may be able to avoid this problem if you switch to a loan with a shorter term.

Does it make sense to shorten the term of your loan? Shortening the term of your loan will allow you to decrease the total amount of interest paid over the course of your loan. Furthermore, paying off your loan in a more expeditious manner may help free up money in the future so you can pursue additional spending goals.

What is your breakeven point? When you refinance your mortgage, you must pay taxes, fees, and closing costs similar to when you first purchase a home. With a lower monthly payment, you will ultimately recoup these costs over time. The point at which your total savings equals your refinancing costs is your breakeven point. If you don’t plan on living in your home past your breakeven point, refinancing may end up costing you money.

Can you eliminate private mortgage insurance payments? If you were not able to make a 20% down payment when you purchased your home, you were likely required to pay private mortgage insurance (“PMI”). When you refinance, your mortgage lender will likely require you to have your home reappraised. If the balance of your mortgage after refinancing is 80% or less than the appraised value of your home, you may not have to pay PMI moving forward.

Would you benefit from accessing the equity in your home? A cash-out refinance allows you to replace your existing mortgage with a new mortgage that carries a higher balance. The difference in value between these two loans is paid to you in the form of a tax-free lump-sum cash payment. This cash payment may help you better manage high-interest consumer debt or pay for any significant expenditures on the horizon.

How much outstanding consumer debt do you have? Consumer debt typically has a higher interest rate than secured debt, such as a mortgage loan. Before deciding to refinance, carefully determine whether the money you would need for closing costs would be better spent paying down the balance of any outstanding consumer debt.

What is your credit score? Mortgage lenders consider your credit score when determining your interest rate. If your credit score has risen since you purchased your home, you may be eligible for a lower interest rate when you refinance. On the other hand, if your credit score has decreased, you may no longer qualify for a desirable rate.

Should you lock in your interest rate with a fixed-rate mortgage? Many individuals use an adjustable-rate mortgage when purchasing a home. With this type of mortgage, the interest rate is fixed for a certain period of time. Once that period of time expires, the interest rate will be adjusted on a regular basis. As a result, you risk paying a higher interest rate in the future. With interest rates hovering near historic lows, you may benefit by refinancing from an adjustable-rate mortgage to a fixed-rate mortgage. This will give you peace of mind knowing that your rate will remain low for the duration of your loan. Deciding whether to refinance is a major decision that will impact your entire financial situation. Accordingly, you should seek the guidance of trusted professionals.

Article provided by Bryan A. Ruder, CFP?, AAMS?, AIF?, AWMA?, CRPC?, MPAS? , Associate Vice President/Investments, Stifel, Nicolaus & Company, Incorporated, Member SIPC and New York Stock Exchange, who can be contacted in the Evansville office at (812) 475-9353 or [email protected]