$MART Money


With mortgage interest rates at historically low levels, it is a great time to consider refinancing. Lowering your interest rate has the potential to save you tons of money over the life of the loan. However, there are a few points to consider beyond simply locking in the lowest interest rate possible: 

1. How long you plan on owning the home: If you are planning on moving in the next few years, the amount you will save on monthly payments may not be enough to offset the amount you will pay in closing costs for your new mortgage. Closing costs to refinance are typically 2%-5% of the loan amount, so it is important to calculate the breakeven point. If you sell the home before you reach the breakeven point, you will lose money on the refinance. 

2. Potentially reducing the term: It is not all about a lower payment. If you can refinance to a mortgage that will be paid in full sooner than your current loan, you may want to consider refinancing. Often, a slightly higher monthly payment with a reduced term can save you a substantial amount of money by reducing the amount of time the interest can compound. Furthermore, a 15- or 20-year mortgage will typically have a lower interest rate. However, it is important not to stretch your monthly budget too much — your mortgage payment (including principal, interest, taxes, and insurance) should be a maximum of 28% of your pre-tax income. 

3. Switch from a variable rate to a fixed rate: You may already have a low rate if you have a variable rate loan, but in the future that rate could move higher. Current low rates on fixed mortgages may make this a great opportunity to lock in an historically low rate that will not fluctuate over the life of the loan. 

4. You are currently paying PMI: If you did not put enough down when you purchased your home, you may be paying private mortgage insurance or PMI. Many homes have seen a significant increase in value this year, so you may now have enough equity to eliminate your PMI. Refinancing is not the only way to achieve this, but you may be able to score a lower rate and get rid of your PMI at the same time. 

5. Cash out refinances: There are many different reasons you might want to access some of your home’s equity such as a renovation or addition or to pay off higher interest credit card or student loan debt. You may be able to access some of the equity in your home while simultaneously the term and/or interest rate of your loan. 

If you do lower your payment, consider how you will use that money. One option is to pay down other debt, like credit cards or student loans, more aggressively, or you could make additional principal payments on your mortgage. 

This will reduce the amount you pay to interest on those debts. Another option is to save or invest your monthly mortgage savings. This is money that you are used to spending every month, so it’s a great idea to put it to work toward your financial goals.

Jenn Sokolowski is a certified financial planner for Metis Wealth Management and Planning.