Here’s how to decide whether you should refinance or not.

 

Should you refinance your mortgage right now? If your interest rate is very high and you can qualify for something lower, that’s a great reason to refinance. Let’s dig a little deeper into the question of refinancing by using a few quick examples:

 

First, let’s say you owe $350,000 on your home for a 30-year term and have the opportunity to lower your rate from 5% to 3.5%. In this case, you’d lower your monthly payment by $307. However, you also have to consider the cost of a refinance this size—let’s say it’s $8,000. If you saved $300 per month, it would take approximately 26 months to recoup the cost of your refinance. If you plan on staying in your house for two years or more, then refinancing makes sense here. 

 

For the second scenario, let’s say you owe the same amount on your home, but this time you’re reducing your rate from 4% to 3.5%. In this case, you’d save $99 per month, but because the refinance still costs $8,000, it would now take a little over 80 months to recoup that cost. That’s nearly seven years—a lot can happen in that time, so I doubt refinancing makes sense here. 

 

Next, let’s say you’re reducing your rate from 5% to 3%, but you’re also switching from a 30-year term to a 15-year term. Your monthly payment would increase by $538 here, but you’re also cutting 15 years off of your mortgage. This is beneficial because if you’ve been in a 30-year mortgage for several years and refinance into another 30-year mortgage, the clock starts all over again no matter how many years you paid off your original mortgage. 

    If your interest rate is very high and you can qualify for something lower, that’s a great reason to refinance.

 

Additionally, you must consider the equity you have in your home. If you have a lot of equity, you can use it to cash out while you refinance. Then, you can use that money to make home improvements or pay off high-interest debt. You can even use it to buy a second property, rent it out, and let the rent payments cover your mortgage. That way, you’re building equity in another property. 

 

If you’d like to talk more about whether refinancing makes sense in your situation, don’t hesitate to give me a call. If you have any other real estate questions, feel free to reach out to me as well. I’d love to help.