If you have a home mortgage, it likely represents one your largest monthly expenses. With interest rates on the decline, you may be wondering if you could lower your home payments by refinancing the terms of your mortgage. Here are some factors to consider:
In recent months, mortgage rates have moved significantly lower. The interest rate on a 30-year mortgage dropped from 4.94% in November 2018 to 3.49% in early September 2019. That means a $750,000 mortgage that would have resulted in monthly payments of approximately $3,999 (principal and interest) at the higher rate, will amount to roughly $3,364 at the lower rate, or a savings of 16% on the monthly payment.
If current rates are noticeably lower than the rate you pay on your existing mortgage, there may be an opportunity to reduce your monthly payment. If you can obtain a mortgage for an interest rate that is at least 1% below the rate you are paying, it is worth investigating. The case to refinance is more obvious if market rates are 2% or more below the rate on your current mortgage.
It’s about more than interest rates: Declining rates are the primary impetus to pursue refinancing. When those conditions are in place, it also opens up opportunities to improve your long-term financial position, depending on the terms of your current loan. You may want to consider:
• Refinancing with a shorter-term loan. There can be significant cost savings over the life of your mortgage if you choose a 15-year mortgage instead of the typical 30-year mortgage. Lower rates may make a 15-year mortgage work for your budget.
• Switching to a fixed-rate mortgage. If you hold an adjustable-rate mortgage, this may be a great opportunity to lock in a low, long-term mortgage rate with a 15- or 30-year loan.
Assessing the costs of refinancing: There are different factors that might offset the potential benefits of refinancing, depending on your circumstances. For starters, refinancing isn’t free. Lenders will assess a cost to the loan equal to approximately 3% to 6% of the principal amount. So, with a $100,000 loan, costs could add up to $3,000 to $6,000. You want to be certain your savings in interest charges will ultimately offset those fees. In some cases, lenders may limit the fees charged, but in doing so, they typically bump up the interest rate.
You’ll need to calculate a payback period on refinancing – at what point will your interest savings overcome any costs associated with the transaction. You should plan on continuing to own the home for at least that long to justify refinancing.
If you are far along on paying off your loan (for example, with 10 years or less to go on your 30-year mortgage), starting over with a new mortgage may not make sense. Being in a position to pay off your mortgage sooner rather than later may be advantageous to you.
Assess your options: You want to make sure your plans fit within your overall financial strategy. Talk to your financial advisor to be certain you understand the full ramifications before moving forward.
1 Source: Federal Home Loan Mortgage Corporation, Freddie Mac Primary Mortgage Market Survey, September 5, 2019. (http://www.freddiemac.com/pmms/).
Ziyah Esbenshade, CFP®, CRPC®, APMA®, is a Financial Advisor and Senior Vice President of Pell Wealth Partners, a private wealth advisory practice of Ameriprise Financial Services, Inc. in Rye Brook, NY. She specializes in fee-based financial planning and asset management strategies and has been in practice for 22 years. To contact her, visit pellwealthpartners.com, call 914-253-8800 or visit us at 800 Westchester Avenue, Suite 300 in Rye Brook, NY.