When to Refinance
Run the numbers with an expert to know when a refinance is right.
Lower your payment , shorten your term, and taking out equity.
A refinance can lower your monthly payment by reducing your interest rate. You are simply paying off your old expensive loan with a new loan. A lot of people say, “but I don’t want to start over”. No problem, when you lower your interest rate, if you make the same payments you were making before you will shave off years, or even decades in the length of your loan.
You can also chose a shorter term when you refinance. For example shorten your 30 year mortgage to a 20 year or 15 year mortgage. If the rates are significantly lower you might have a similar payment but not have the loan for nearly as long. This shaves off tens or even hundreds of thousands of dollars off your total payments during the life of your loan.
The other option is to increase your loan size to turn your home’s equity into cash. This can be great for renovations, other investments that return at a higher rate than the mortgage rate, or to pay off more costly debts like credit cards or auto loans.
When is the timing right? It all comes down to the numbers.
If you can save or improve your biggest loan why not. Well potentially you think rates will continue to fall. In that case it is important to run a break even analysis on the benefits of refinancing. You want to consider how long you will likely have the new mortgage before refinancing again, if rates go lower. Nothing is certain, but rates in 2025 are projected to be lower than in 2024. It is important to compare the short term benefits to the costs of a refinance.
What does a refinance cost?
A refinance doesn’t have to cost any money out of pocket. There are closing costs such as your title and escrow fees to record the new mortgage, however there are 2 ways to get those covered.
Lender Credits - Have a lender credit cover all closing costs. Just like you could pay discount points to get a lower interest rate, you can also take a credit from the lender for having a higher rate. This may be a great option if you only plan on holding the new mortgage for a short amount of time.
Cover with Loan Amount - A slightly higher loan amount can allow financing in the small amount of closing costs. This has a minimal effect on your new payments and can be a great way to lock in savings without paying anything up front.
Structuring your refinance takes an expert diving into your exact situation. The time you plan on being in the new mortgage matters. A good lender will tailor your refinance to fit your future plans and positions. Is this your forever home? Are you retiring soon? What are the rate projections from the fed? These are the important questions to consider alongside expert guidance.
What if rates continue to fall?
If rates fall you can always refinance again. That is why the structure of your refinance is important. You don’t want to significantly buy down your interest rate for a mortgage you aren’t going to hold long enough to recoup the buydown cost.
With rates projected to continue dropping in 2025, most people refinancing in 2024 are making sure that refinancing now is set up to still make sense even if the homeowner refinances again in the near future.
