A guide to deciding whether refinancing your mortgage makes sense. The speaker walks through the key factors: interest rates, closing costs, and how long you plan to stay in the home. Refinancing only pays off if your new rate is low enough to cover what you'll spend upfront.
Hey guys, I'm sure you've all been hearing that interest rates have dropped recently. The Federal Reserve cut interest rates by 1/4 point. Rates are continuing to fall. Today, interest rates have fallen sharply. While it's true rates have dropped to multi year lows and many people would benefit from refinancing, there's actually a few situations where you would not want to refinance, and we're going to talk about those today. So whenever you're considering a refinance, there are three things you want to look at. The first thing is the interest rate, which is most important. Second thing is the closing costs, which are, I would argue, equally important. And then the third, third item that people often overlook is the term. When dropping your interest rate. Many times people will ask, how much should my rate go down in order for me to refinance? If the refinance is going to cost you a significant amount of money, then the criteria for how much your rate should drop is much higher. Conversely, if the refinance is going to be very inexpensive, then you don't have to drop your rate as much in order for it to be worth it. This is where people get hung up A lot is on the closing costs. Many times lenders will advertise a super attractive interest rate, but the fine print says that this rate has significant costs associated with it. For example, you may be able to drop your interest rate by a full percentage point, but if it's going to cost you several thousand dollars to do so, it may not be worth it. The simple formula for calculating whether the costs are too high would be to take how much you're going to save per month and divide it by the total closing costs on the loan that equals the number of months it's going to take you to recoup the cost to refinance. Now, if you're going to be in the property longer than that number of months, it would be worth it for you to. Now, if you're unsure that you're going to be in the property for that length of time, it may not be worth it for you to refinance. The last item that people often overlook is the term. The way mortgages are structured, the banks collect the majority of the interest in the beginning of the term. When you look at your mortgage statement, the majority of your payment is going towards interest. This changes over time and as you get deeper in the term, more goes towards principal. So if you are five or more years into your term, you do not want to go back to the start. For example, if you are five years in on the 30 year term, you have 25 years left. You don't want to start over at year number 30 because you're going backwards as far as that ratio of principal versus interest. We would have to run the numbers to see whether or not this would benefit you or be to your detriment. So as you can see, there's many different things to consider when doing a refinance. It's not so simple. The way I simplify it personally with my clients is I offer them a low cost or no cost refinance and this makes all of this math very easy because the refinance isn't going to cost you very much at all. If you'd like to run an analysis on whether or not you should refinance or if you just have questions in general, please leave a comment below. And if you haven't done so already, please hit that like button and I will see you guys on the next video.
