The fear of rising interest rates might be tempting you to refinance your home. Or perhaps you want to reduce your monthly mortgage payment. Maybe you need access to money to consolidate credit card debt or finance a remodel.
The refinance game always seems like a bit of a gamble – will rates go up or down? Fortunately, by asking yourself a few key questions, you can be better equipped to make a decision that’s right your current situation AND your financial future.
Look beyond your new monthly payment amount
Refinancing can help you lower the amount of your payment each month, but be careful, because focusing on a lower payment isn’t necessarily the best strategy for everyone. Before you make a decision this big, be sure you’ve done your homework and have spoken to a trusted adviser to ensure that refinancing is the best option.
Often, people are so focused on the interest rate or lower monthly payment that they forget to consider that when you refinance your home, you start over with a new loan. With any mortgage, the goal is to increase the equity in your home, and ultimately own it free and clear. Depending on what you refinance into, you may be increasing the amount of time it will take you to own your home and it can increase the total amount you’ll pay in interest over your lifetime.
So when should you refinance?
Conventional wisdom says that you should consider refinancing if you can drop your interest rate by about 2%. With today’s rates floating around 5%, that means a 1% drop in the base rate. BUT, be sure to look at what you owe before you refinance, then compare that to your loan balance after refinancing. If you’re adding thousands to your mortgage balance, then you may be negating any savings that you would receive from a lower interest rate.
If your household income is higher now than it was when you first started your mortgage (and will stay higher), then you may want to consider refinancing into a loan with a shorter repayment period; for example, refinancing from a 30-year to a 15-year mortgage.
15-year mortgages generally come with a lower interest rate than a 30-year loan. You’ll also pay interest for a shorter period of time, which could end up saving you quite a bit of money, and you’ll be mortgage-free sooner. However, your mortgage payments would likely be significantly higher and it will restrict your flexibility when money is tight. If you’re unsure how much longer your income will be higher (ie if you’re planning on retiring soon), then you may want to consider just making an additional mortgage payment (s), versus refinancing.
If you’re thinking about refinancing, we’re here to help! At Washington Federal, we don’t sell our loans – unlike most banks. Why does that matter? Well, if rates fall in a few years, you might be able to lower the rate on your existing mortgage with us.
Best of all? This can be done without refinancing! So you don’t have to start over. And you can build equity faster and pay off your home on schedule.