I was recently asked if I could comment on the feasibility of refinancing. I thought my response to that question would make for a good article. Keep in mind my answer will just barely approach the subject and that it is important that you have someone look over the exact facts of your situation to evaluate if you should refinance or not. I strongly recommend working with a fee-only financial advisor before you meet with a mortgage broker. A fee-only advisor can be your advocate and help you to better understand if refinancing is right for your individual needs. A mortgage broker will only benefit from your business if they actually “sell” you the refinance. Why not get an objective opinion before you move on to meeting with the commissioned salesperson?
Here are a few pointers to remember when looking at refinancing:
1. How long do you plan on living in the house? If the answer is not at least 3-5 years, then you will probably not recover the closing costs.
2. What is the new interest rate you will be receiving? If it is not at least a 1-1/2% less then your current rate, then it is probably better not to refinance. Also, does your new interest rate involve any points? Will your new mortgage require you to pay private mortgage insurance (PMI) while your current mortgage does not?
3. Has your credit score significantly improved since you purchased your previous mortgage? What is your current debt-to-income ratio?
4. How much difference will it really make in your monthly payment? I have heard from some of my mortgage broker friends that lending institutions now have payment difference minimums that they need to see before they offer you a refinance.
5. If you are currently in an adjustable rate mortgage (ARM), I highly encourage you to meet with a professional to see if refinancing to a fixed-rate mortgage is a possibility. One of the main benefits of home ownership is the leverage a fixed-rate home mortgage has in regards to inflation protection. If you have an ARM mortgage, then you are giving your institution the hedge against inflation.
6. Make sure you understand how many more years you will be paying if you “stretch” the amount of years to a longer period then what you currently have left on your mortgage. Sometimes refinancing can be a “wolf in sheep’s clothing” when you really look at the hard numbers.
7. If refinancing is the best option for you, then don’t wait on it. I have heard countless stories from people who were looking at refinancing when the rates where around 4.8% a few months ago but they wanted to wait and see if rates would go lower. This philosophy is similar to the “market timing” approach with investing and from my experience; most of the time I find the consumer will lose this game. If it is right for you now, then do it. Don’t wait!