Interest Rates Are At Historical Lows – Should You Refinance Your Home?
With historically low-interest rates, the topic of refinancing your home has become very popular. Refinancing your mortgage means negotiating your existing mortgage loan agreement and getting a mortgage with a lower interest rate is one of the most popular reasons to refinance. But even when mortgage rates are low, it may not be the best idea to refinance, because refinancing always involves some sort of a ‘cost–benefit analysis.
Reasons to refinance:
Lock in a lower interest rate
This is more effective if you obtained your mortgage around 10 years ago, probably at a higher interest rate. However, if you bought your home a year or so ago, the lower rate may not be attractive when the refinance costs are considered.
Lower monthly payments
Refinancing at a lower rate could potentially lower your monthly payments. If you have 10 years left on your mortgage and refinance for the 10 years, your payment will probably go down. But if you renew for a longer 15-year period, for instance, your payment will go down, but you will be spreading out your mortgage over a longer period of time.
Own your home faster
If you have 15 years left on your mortgage and refinance for 10 years at a lower rate, your monthly payments may go up, but you will pay off your mortgage 5 years faster and save 5 years of interest payments.
Use your home equity
Refinancing will enable you to access the equity accumulated in your home over the years to either pay off debt, renovate your home or buy an investment.
Reasons not to refinance:
High closing costs
You have to pay closing costs when you refinance your home and these closing costs may take a few years to break even. If you plan to move out of your home within the next couple of years before you have recouped these costs, you will probably end up losing money, even if you lower your monthly payments in the interim.
Longer to pay off your home
Refinancing your home over a longer period than your current one will be expensive as you will end up paying more interest. While the overall interest rate and the monthly payments may be lower, with the longer amortization period, the amount owing on your mortgage will be higher.
You may not qualify
Applying to refinance requires an entirely new application process. The lender has to ensure that you are credit-worthy and can afford the monthly payments. If your financial situation is not as secure as when you took out your current mortgage, you may be hard-pressed to qualify.
Refinancing into a shorter-term loan normally results in higher monthly payments. Although this may be affordable now, you cannot predict what your finances will look like in the future. If your financial situation is not secure, then this option would not be advisable.
If you have any questions on this topic or any other real estate related one, contact us and one of our experienced advisors will be only too happy to help.