We keep expecting interest rates to rise, but then they get cut again.
If you're carrying a mortgage, maybe it's time to refinance.
Should you do it? That depends.
If the value of your home has increased since you bought it, so has
your equity. If you put less than 20% down on your home's purchase price,
you're probably paying PMI (Private Mortgage Insurance). The rise in equity,
combined with the principal retired since you took out the loan, may equal more
than 20% ownership, which will enable you to drop the PMI when you refinance.
(PMI protects the lender against the risk of foreclosure, and when the buyer
has more skin in the game, i.e., at least 20% equity, the lender figures the buyer
has less incentive to walk away.)
Some homeowners see that increased equity as an opportunity to borrow funds
needed to make improvements. Add a pool. Renovate the kitchen. Finish the
basement. Build a sunroom. Before you refinance your mortgage, compare available products with the mortgage you already have. Maybe it's smarter to take out a home
equity loan for your project.
Look at the interest rates and terms being offered compared with your
current mortgage. If you can lock in a low fixed rate, now may be the time to
refinance that adjustable-rate loan, guaranteeing uniform payments for the life
of the mortgage. When interest rates rise steeply, homeowners lured into
adjustable-rate mortgages can get into financial trouble, with payments rising
to unmanageable amounts.
When I still had a mortgage, the popular rule of thumb was, if interest
rates go down at least 2%, refinance. But there are other factors to consider.
Refinancing isn't free. Just as when you took out your first mortgage,
there will be closing costs. You'll need an appraisal of the home's value,
credit reports, title insurance, bank and attorney fees. Some lenders may
require you to pay "points." In mortgage lingo, a point is equivalent
to 1% of the amount borrowed. Some institutions charge "origination"
points, which are part of the closing costs to compensate the lender. They may
also offer "discount" points, which I always thought was a misnomer
(it's not a discount; it's an added cost to the buyer). Discount points are
paid upfront to "buy down" the interest rate. Pay a chunk of interest
at the beginning of the loan so you can enjoy slightly lower payments.
After you've compared products and estimated costs, calculate how long
it will take to break even and start realizing the savings from lower mortgage
payments. If you're planning to move before that, or if the timeline is so long
you don't know what you'll be doing yet, perhaps refinancing is not a good
idea.
Another disadvantage of refinancing is that you're starting over with a
new loan. Most are for 30 years (some are for 15 or less, but they require
higher payments). Maybe you've been paying on that mortgage for a decade or
more, and you're starting to see light at the end of the tunnel. Maybe you plan
to retire before your 30 years is up, and wouldn't it be nice not to have to
keep making mortgage payments?
Retiring with a paid-off home and no debt can be exhilarating. With a
small financial footprint, you need much less income to sustain the lifestyle
you want.
And then some people consider mortgage payments a perpetual cost of
living, no different from insurance or utilities. My mother-in-law refinanced
her condominium multiple times during retirement, and she still carried a
mortgage when she died at age 97, even though she'd lived there for more than
30 years. (She told people it was paid off because we'd switched her to automatic
payments a few years earlier, and she no longer had to write out checks to the
mortgage company.)
What experiences have you had with refinancing? Was it a good decision?
I'd love to hear your comments.
