Ray’s Take: Home mortgage interest rates continue to be low, causing many homeowners to wonder whether they should consider refinancing, even if they feel like they just did it. The answer is “maybe,” but there are a lot of things to take into consideration.
Refinancing doesn’t just mean securing a lower interest rate, it can also mean closing costs and sometimes points and prepayment penalties. Of prime consideration when considering refinancing is how much longer you intend to stay in your home. If you think you’ll move in a few years, the little bit of savings in your monthly note may not add up to cover the other costs of refinancing.
Refinancing is usually only a good idea if ultimately it will reduce the total cost of your mortgage, including interest, over the whole duration. If you’re gaining a lower monthly note but are ultimately paying more for your home because you’ve extended the term of your mortgage, you are probably hurting yourself financially. After all, instead of the shorter payment time left on your existing mortgage, you’ve just extended your payments. The longer you’ve held your existing mortgage, the more you stand to pay.
However, there is one way that refinancing can save you thousands of dollars, and this is if you switch to a shorter-term mortgage. Consider this: if you have a $200,000, 30-year mortgage at 4 percent interest, your monthly payment (not counting any insurance or property taxes) is approximately $950; however, you’re ultimately paying around $343,000, for that mortgage.
On the other hand, if you can handle a monthly payment near $1,200 with a 20-year mortgage, your total cost sinks to about $291,000, which means you’ve saved nearly $52,000 in interest. Remember, that’s with interest at the same 4 percent rate. If you are securing a lower interest rate – which is the main reason to consider refinancing – your note may be virtually the same and your savings would be even greater.
Now, that’s worth refinancing for.
Dana’s Take: Despite the housing market slump, many people still have homes worth more than their mortgages. A lot of financial institutions would encourage you to take out a higher mortgage on the same property, with the additional amount borrowed coming to you in cash.
This might be a great deal for the lender, but it might not be so good for you. No matter what good use you have for that extra cash in-hand, the reality is you’ll be paying interest on it for the life of your new, higher mortgage. That mounts up to a lot of interest on a 30-year loan, even if the interest rate is low.
It’s probably a better idea to try and save up the cash you need. Do the math and think twice.
Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at firstname.lastname@example.org.