I'm Busy But Curious - Is It Worth the Time To Refinance?
One side effect of the pandemic is that interest rates have continued to fall in 2020. While this is not good news for your cash savings account, it can be welcome news when it comes to refinancing opportunities.
The decision to refinance has several layers to it that often starts with what interest rate you are paying now and what are current rates being offered. If the rates being offered are less than what you currently pay, it may be worth taking a closer look. Once the current rates are .50% to .75% less than your current rate, it starts to be more compelling and worth reaching out for a quote.
While the going rates may be the first layer, digging deeper there are often other reasons to consider refinancing that should play into the decision. Are you looking to pay off the loan faster? If so, you can consider looking at shorter term products like going from a 30-year mortgage to a 15-year mortgage. A shorter loan term often comes with further reduced rates but can potentially increase the monthly payment so you would want to be sure there is room in your ongoing budget to take on the additional expense.
Or are you looking to free up cash? In this case, you could refinance understanding that you may be extending the overall length of your loan payments in exchange for a lower monthly payment. For example, if you had a 30-year mortgage and made ongoing payments for 5 years, then refinanced with a new 30-year mortgage, in effect you will have a combined 35-year mortgage. The additional years may not be a concern, but you should keep an eye on how much interest you will pay over the course of your current loan vs. a refinanced loan to understand if the new loan will actually save you money in the long run.
The final component of refinancing is how long you intend to stay in your current home. Obtaining a new loan includes closing costs that need to be factored in. Closing costs vary from lender to lender but likely fall in the range of 2% to 5% of your loan balance. A simple version of finding out how long you would need to stay in your home for refinancing to make sense is to take the closing costs and divide it by your monthly savings from refinancing. If you plan to stay in your home longer than the break-even point, then it is certainly worth carving out some time to refinance your loan.
If you would like assistance in determining if a refinance makes sense for you, please reach out to JFlaherty@vantagefinancial.com to discuss.
The facts and opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Where applicable, all data and information has been gathered from sources believed to be accurate such as the internet, nonaffiliated 3rd parties, news articles and professional subscriptions but this information is not warranted to be correct, complete or true. Vantage Financial Partners Limited, Inc. and its agents are not tax advisors or accountants. We strongly encourage you review your tax situation, opportunities and liabilities with your tax advisor before making any changes. This article is not intended as tax advice.