Several years ago my wife and I decided to refinance our home (and then a year later, our rental house). One of the main reasons for the refinance was to lower our monthly payment as well as take advantage of the lower interest rates.
Another factor was that we didn't have any short or long-term plans to move out of the home. This was important to consider because it wouldn't have made a lot of sense to refinance, if we were planning on a short stay.
I bring all of this up because lately, I have been hearing and reading about rumblings of higher interest rates that may be coming. In fact, many think they will happen this month. However, these predictions have been wrong before and the Fed has shown a reluctance to raise rates in a somewhat fragile economic environment.
Asking the mortgage pro
All this talk about refinancing and if / when the Fed could be raising rates got me to thinking about if now is a good time to do so. OR, if timing even matters that much in refinancing.
And so I shot an email to our trusted mortgage professional, Jim, who is super helpful and knowledgeable about all these matters.
I first came to Jim over ten years ago at the height of the housing boom. Everyone and anybody was getting a mortgage and making money in the process (often by taking on risky, interest-only loans). Even though I was still in-debt, I felt I'd like to enter the real estate game too.
I laid out my intentions to Jim and he told me what I needed to hear: Don't rush into buying a home and pay off my debt. It was refreshing to get this counsel from someone who could easily have made money off me (like many others were doing at the time).
So, I thought I would see what Jim had to say regarding what folks should keep in mind before doing a refinance. I hope they help you if you find yourself looking at this possibility.
Things to consider / look into before refinancing (according to Jim, the mortgage pro)
- Term or length of new mortgage should be the same or shorter than the current mortgage. Going back to the original term (30 years ) is expensive as most of the payment goes to interest expense. Keeping the new term equal to the remaining term reduces the interest expense overall and benefits the homeowner.
- Know your credit scores and improve them prior to refinancing. Even if it means delaying the refinance. Scores over 740 receive better rates.
- Estimate how long you intend to have the property and the mortgage. Rarely does one stay long enough to payoff the mortgage. The costs to refinance should be recovered in 3 years or less when measured by closing costs versus interest expense saved. Do not use the differences in the mortgage payment, this will encourage the use of a 30 year mortgage. Mortgage calculators are misleading because they assume you will have the mortgage for the life of the loan. Loan balances are different for different closing scenarios and terms.
- Increasing the rate and not paying closing costs to refinance are the least risk way to refinance. The payback period is usually the shortest. Less risk when life happens and you move unexpectedly and you forfeit the “low rate” you purchased. If the no closing cost option is not financially beneficial, that is usually an indication it is not a good idea to refinance.
- Fees and escrows are important to understand, they are not the same. Escrows are related to ownership costs and fees are costs to refinance. So when refinancing only consider the fees or closing costs and exclude the escrows.
I also asked Jim if he thought now would be a good time to refinance, given the recent talk of higher rates. This is what he said:
The time to refi is when it makes financial sense. Rate movement is nearly impossible to predict. The charts and market comments all indicate the trend is for higher rates. We have been at historical lows for several years. So the probabilities are for higher rates. Yet, the experts have been wrong before. If anyone really knew, they would be a billionaire in a short time.
All in all, wise advice – and we hope that it helps you, if you are in the market to refinance.
While Jim isn't a big fan of those mortgage calculators, feel free to use the one we have below to give you some sense of costs involved.
Here are some other articles we have written on mortgages / refinancing:
- LendingTree Review
- My Experience Getting Out of a Non-Contingent Home-buying Clause
- Mortgage Payoff and the Road to Debt Freedom
- Refinancing When You are Underwater
- Steps to Obtain a Mortgage
Have you recently gone through a refinance? Any words for the wise?