Is Now the Right Time to Refinance Your Mortgage?

Eastside Business Journal, Washington
By Rick Hubbert

How do you know when it is the right time to refinance? Some believe that if homeowners can shave one point (1%) off their existing rate, then it is in fact the right time. Although this is a simplistic answer, it may not be the correct one.

Refinancing your mortgage depends on your individual set of circumstances. For example, do you have excess credit card debt? If so, it may be possible to refinance your mortgage, include cash back to pay off your credit cards, and be rewarded with a fixed lower payment. You could also benefit from the income tax deductibility of mortgage interest as compared to non-deductible consumer credit interest.

Often the answer as to when one should refinance is simply a math question. Generally the goal of refinancing is to lower your monthly payments. However, there are costs associated with refinancing, like title and escrow expense, appraisal, lender fees, etc. If you take your proposed monthly savings and divide this into the total costs, your answer is the time factor necessary to recoup your costs, or break even. Typically, the time factor is 48-60 months. Then you need to consider how long you plan on living in your home to determine if it makes financial sense to refinance.

Some lenders advertise a no cost refinance. Obviously, there is no free lunch, so these lenders offset their costs by covering them with a higher interest rate. However, this can be a good way to go, as this scenario also is in reality a math issue. Compare your proposed monthly payment under this “no cost mortgage” with the payment from the fee based refinance with the lower rate. Now consider how long you plan on living in your home. Does it pencil out to pay the higher rate and reduce your out of pocket expense?

A word of caution: Some lenders will advertise a no cost refinance and then roll the client’s costs into the new loan balance. You may not have to bring any money to the table at close of escrow, but you will pay much more in the long run as you are now financing the closing costs with interest for the term of your new loan.

Finally stability and peace of mind are factors that must be considered. Do you have an adjustable rate mortgage that will reset in the near future? If so, you may want to consider moving to a fixed rate mortgage, especially now, as long term interest rates are low compared to historical averages.

If you are considering refinancing, seek the advice of a knowledgeable mortgage consultant. Remember that ethical consultants always place their clients’ interest first and foremost.