Interest rates are low and house prices are soaring—so, should you refinance?
What Factors Should You Consider?
There are many factors involved in the refinancing decision—your current interest rate and term, where you are in the lifecycle of your loan, what loan you want to apply for, the cost to refinance, your breakeven for recouping that cost and your monthly cash flow considering your new payment are just to name a few. Of course, this also assumes you plan on staying in your home for the near term as well.
Compare Your Amortization Schedule
There are different ways to analyze all these factors. You can go to websites that have amortization calculators (such as bankrate or nerdwallet) to look at your current amortization schedule and compare it to a new one with the new terms. It is not always about the total monthly payment. Look at the breakdown of the monthly payment and see how much is going to principal and interest. When you start a new loan, the interest is front loaded-meaning most of your payment goes to interest, not reducing your loan balance. If you think you are only going to stay in your home for another 5 years, then look at your principal balance at the 5-year mark and factor in the cost for obtaining the new loan.
In today’s housing market, home values are soaring. If you did not have a 20% down payment, you may be paying PMI (mortgage insurance). With increased home values, you might be able to refinance and have your PMI removed. This could be savings in your pocket in addition to an interest savings.
The moral of the story is that there are different reasons to look at refinancing options–both financial and emotional—and there are different factors involved with these decisions. No situation is the same. Navigating these types of decisions, in line with your unique personal goals, is what we do here at Financial Journey for our clients. If you are looking for a trusted partner to help you navigate these types of decisions, we are here to help. Schedule a meeting with us today to see how we can help you with your own financial journey.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.