Mortgage rates are at historic lows & the refi calls continue to come in. However I find myself recommending to not refinance to many clients. Huh?! Yes you heard right! The loan officer (me), who earns a living ONLY when you refinance (commission paid sales person) is telling clients to not pay me! The what-choo-talkin’-bout-Willis look is currently on your face. Allow me to explain.
Ask yourself the following questions:
- How long do you plan on living in the home for?
If you plan on selling the home in the near future & you can’t recuperate the closing costs in sufficient time to actually save money, don’t do it. The plan must make sense!
- Do you have equity in your home?
Refinancing might not make sense or even be possible if there’s insufficient equity.
- How long have you paid on your current mortgage?
If you paid 10 years into a 30 year mortgage, refinancing to a 30 year mortgage will only increase your costs. There are unique circumstances where you are forced to refinance due to financial crisis, lose of spouse’s income, divorce etc. These are the exceptions.
- Do you have a spending problem? Refinancing to pay off credit cards/short term debt may be huge mistake. Stop & think first. Can you pay off your credit card/short term debt with the next year or so by budgeting? Do you find yourself consolidating credit cards only to open up new ones to charge up again?
When does refinancing make sense?
- Will you save money on a monthly basis? No brainer unless you are increasing the amount of time you must pay. You could be making it more expensive in the long run. Keep in mind you MUST recuperate your closing costs in a reasonable amount of time. I like to see costs recuperated in 12 to 18 months max! Even better is getting a no closing cost refinance. Savings are immediate!
- Can you decrease your term hence paying less in interest? If you have a 30 year mortgage you’ve paid 10 years on but can get a 15 year at the same or slightly higher payment, well that makes sense!
- Are you getting a divorce & want to keep the home? For the other spouse to no longer be responsible on the mortgage, REGARDLESS of what your settlement agreement says, you need to refinance. Remember that a mortgage is a legal contract between the mortgagor (individual(s) who borrowed money) & mortgagee (the bank). That contract can’t be changed without the bank’s permission. So you know how your ex-spouse decided to keep the home & now pays the mortgage late or doesn’t pay at all? Well guess whose credit’s suffering? I’ll give you a hint: look in the mirror!
- Do you have equity, need more space & love where you live? If you love where you live, the kids must stay at the school they’re in & you have equity then you can decide to build an addition or upgrade your home so you have the necessary space/features to live comfortably.
- Do you plan on selling within 5 years & have a 30 year fixed? A 5/1 adjustable rate mortgage is a great option. Remember that the goal is to pay the least amount possible for the money you borrow for the time you have it. Why get a permanent solution (30 year fixed) if you have a temporary problem (selling in 3 years)? With a no closing cost refinance, your savings can be immediate!
Each and every client is unique. Together we must look at your goals & figure out if we can put a plan together that makes sense. For most people, your home is the largest investment you’ll ever make. Choose who you take advice from wisely.
One facet that I find to be one of the most, if not the most important is how long it takes you to recuperate your closing costs. Look out for this article in the near future!