SHOULD I REFINANCE?
At least once a week someone will call me about a postcard, email, social media promotion, etc. they received promoting this amazing low mortgage interest rate. Interest rates are at an all-time low right now and it may be a good time to consider refinancing your existing mortgage.
What are some of the primary reasons to refinance?
- Lower your interest rate and monthly payment
- Shrink the term of your loan and payoff your mortgage earlier
- Consolidate your existing debt and lower your overall payments
- Eliminate monthly mortgage insurance that is on your existing mortgage
- Your new loan will be a fixed term vs. an adjustable rate mortgage
- Take cash out to remodel your home, purchase another property (second home or investment property), etc.
A general rule is to refinance when your new rate will be a full point below your existing rate (i.e. existing rate is 4% and your new rate is 3%). However, you may have other reasons to refinance when your new rate is not a full point lower. When consolidating your existing debt, I encourage you to determine your existing blended rate (your mortgage and the debt to pay off) to determine if it makes sense to refinance your mortgage and take cash out. There is a simple formula you can use to do this.
First, multiply your loan amount and credit card balances by the interest rate to determine your weight factors and total the loan amounts and per loan factors as below:
Loan Type Balance Rate
Mortgage - $175,000 x 3.75% = 6562
Credit cards - $ 25,000 x 9.0% = 2250
Totals - $195,000 8812
Divide the total per loan weight factor by the total loan amount and then multiply by 100 to calculate the blended rate or weighted average.
8812 / 195,000 = 4.50%
While you have a great interest rate on your mortgage, your blended rate for all your debt is closer to 4.50%. This should make it easier to consider a higher interest rate when consolidating your debt.
The most common amortizations include a 15-year and 30-year mortgage, but you may be able to lower the term of your loan (20 or 25-year) and keep your payment the same. This is a great approach if your goal is to pay off your mortgage as soon as possible.
The costs associated with a refinance may include title work, appraisal, credit report and possibly a processing fee. You may be required to re-establish a new escrow account for the lender to pay your insurance and taxes each year. The total costs to refinance your loan could be $3,000-$4,000. Depending on your loan to value (new loan amount divided by the value of your home), you may be able to finance these fees into your new mortgage. If your goal is to lower your monthly payment, I suggest you recoup these costs in your monthly savings within 36 months. For example, if your total fees are $3,500 then your new monthly payment should save you at least $98 per month on your payment ($3,500 divided by $98 = 36 months).
It is usually better to finance these fees into your new loan vs. paying for them out of pocket. Paying $3,500 out of pocket may save you an extra $15 on your payment, but it will take you almost 20 years to recoup the savings on your payment.
I encourage you to reach out to your lender and they can provide you with the many loan options available. Feel free to contact me directly if you have further questions.
Wishing everyone a safe and a Happy New Year!
Branch Manager, NMLS #1721861
Cherry Creek Mortgage, LLC, NMLS 3001