It is a fact: mortgage interest rates have been dropping. How low will they go is anyone’s guess. How do you know when to refinance? Does it make sense for you? What is the break-even point of refinance closing costs vs. overall savings? Let us answer these questions and more…
By now, many people have heard that mortgage interest rates are dropping. What does that mean to you? At Skyridge Lending, we want you to know your options. We want to help you make an informed decision on what is best for your situation. Many things in life are about timing. A low rate market is a window of opportunity! So when should you refinance? Since no one really knows exactly what rates will do, we believe if you are comfortable with your savings and your break-even point is reasonable, now is the time to refinance.
Your break-even point is calculated by figuring out how much you would save on your mortgage payment each month divided into the total cost to refinance. Refinancing usually makes sense whenever the break-even point is reached in under 24 months. Additionally, certain closing costs can be a tax deduction (consult your CPA) and can help you recoup your savings more quickly. However, the standard break-even analysis will show you the amount of time it will generally take to recoup your costs to refinance.
The goal is to anticipate the lowest point at which rates will reach, before they trend back up, as this could cause you to miss out on the opportunity to refinance altogether. For example, if someone saves $300 per month to refinance now, but they wait for rates to continue falling in order to save more, they risk missing the opportunity to refinance at all, in the event rates began increasing again. Historically, interest rates typically come down slowly and go up quickly, so you will want to be diligent in communicating with your lender. Skyridge Lending can help you monitor the market and determine when and if it makes sense for you to refinance. Let us calculate your break-even point now so you can decide when and if it makes sense to refinance. Have a plan so that you can maximize this window of opportunity.
Closing costs can be rolled into the loan. Again, this comes back to your break-even calculation in determining what makes the most sense. You can also buy the interest rate down further by paying discount points. These are often a tax write-off for those who itemize taxes (consult your CPA).
Term is another important consideration. Does it make sense to reduce your term, greatly decreasing the overall amount of interest paid? In that case, rather than paying a mortgage for 20-30 years, you pay it off in 10-15 years. Or does it make more sense to spread your term out to 30 years and consolidate other debt into your mortgage payment? Or perhaps invest the difference? What is the opportunity cost of your investments? Skyridge Lending can even keep your loan term at the exact number of remaining months you have now and simply reset your interest rate for a lower monthly payment.
Are you paying mortgage insurance when you shouldn’t be? If your home is worth enough to keep your loan amount below 80% of its value, in most cases, you should be able to eliminate your monthly mortgage insurance payments. It also may make sense to pull cash out of the value of the home to pay off other debts or do some home improvements. Each situation is different, and every lender is different on this. At Skyridge Lending, we can explain different options for your scenario and help you decide what makes the most sense.
In summary, low interest rates grant you an opportunity to evaluate your overall financial picture and ensure you have the best loan product for your situation. Interest rates, loan terms, cash-out, debt consolidation, mortgage insurance, loan types (Conventional, FHA, VA, All-In-One, etc.), discount points…these are all things we can help you consider.
We hope this post has given you something to think about. Our goal is to help you achieve your financial goals by getting out of debt as quickly as possible and/or helping you position your funds for other assets and investment growth. For most of us, it is about finding the right balance and then having a specific, strategic plan to follow. Call us so we can design your custom plan and answer any questions you may have.