By: Joshua Winterswyk, CFP®
Global stock markets and interest rates have plummeted over fears of the coronavirus, as the federal reserve cuts rates and investors search for safety.
Mortgage rates are again at all-time lows. Current interest rates for a 30-year mortgage are 3.313% APR (3/11/2020), which I am sure will change in the next few days.
When mortgage rates drop, one of the first questions I get is “Is now a good time to refinance my mortgage?”
Here is what you should consider before calling your mortgage broker.
What Is the Goal of the Refinance?
It is very important to tie a goal to the refinance. This will make it easier to make the right decision. A few examples of goals are lowering overall interest paid, increasing cash flow, or consolidating debt.
Each goal requires a next step, which is to run the numbers. Make sure the new loan will achieve that goal and that your analysis backs it up.
How Long Do You Plan on Living in Your Home?
Because there are closing costs and a new loan is created when refinancing, it is important to ask yourself how long you will stay in the home.
Most break-even analysis comparisons I have run are two to seven years. If you aren’t going to stay in your home longer than that, it might not make as much sense to refinance.
How Much Will It Cost to Refinance the Mortgage?
Closing cost are very important when comparing the possible refinance. This is a big part of the break-even analysis.
Also, who wants to pay more in closing costs? The average closing cost is between 2 and 3 percent of the amount financed. For example, a $450,000 mortgage could cost between $9,000 and $13,500 to refinance.
What Term Is the New Mortgage?
Are you looking at 30, 20, or 15 years? Depending on when you first started your loan, this factor is important. Make sure that the term is aligned with your overall goal.
Remember, if you have only 20 years left on your mortgage and you refinance to a new 30-year mortgage, you essentially extend the term and potentially pay more in interest.
What Are You Planning to Do with the Savings?
The new loan might create a monthly savings. What are you going to do with the savings? Make additional principal payments, contribute more to investments, or spend it?
How Does the Refinance Affect Your Taxes?
You might want to pick up the phone and call your CPA to discuss how refinancing might impact your tax situation—especially if you are currently itemizing. The change in tax law limits the amount of interest you can deduct.
With interest rates so low, now is a good time to consider refinancing. It could save you money and lower your payments. Just make sure that you do your due diligence or ask your financial advisor for their recommendation before you sign the dotted line.