With interest rates at or near 60-year lows, many homeowners are wondering if they should refinanc their home mortgages.The Internet is full of free financial calculators that can be used to determine payback time for recapturing the closing costs. But there are other options available that should be considered in addition to payback period.
When evaluating whether refinancing makes sense, homeowners should consider their existing mortgage balance, present interest rate, how long the rate is guaranteed and their monthly payment.They also should evaluate how long they plan to be in their existing home.If a short-term move is in their plans, refinancing may not make sense.
In recent years, closing costs have been on the rise, particularly due to the intensive regulatory climate.However, compensating for higher closing costs, today’s record-low interest rates often make refinancing attractive purely for additional cash-flow savings.
Under most circumstances,the best loan option for most individuals is a 30-year mortgage with a fixed rate, which produces the lowest monthly payment. It also affords the opportunity to redirect the monthly savings into various long-term investment optionsmay yield a return exceeding the new mortgage interest cost.
By taking the difference between their current monthly payment and the new payment, and then dividing that amount into their estimated total closing costs, borrowers can determine the number of months it will take to break even under a pure cash-flow basis.With this knowledge, new homeowners can determine how long they need to stay in their home to break even on a refinancing.
Some variations on a three-, five, or seven-year adjustable rate mortgage (ARM) loan may make sense depending on how long someone plans to stay in the home.Potentially lower interest rates available for short-term loans may allow fewer months to recapture the closing costs.
In addition to refinancing questions, borrowers are also asking about the prudence of making additional mortgage payments each year. In fact, some lenders are recommending that customers make 26 biweekly payments in a year—a strategy that effectively result in 13 monthly payments versus the required 12.
As a general rule, most borrowers should not make these extra payments. A banker or financial advisor can usually work with them to take that additional money and put it in better long-term investment options, especially with today’s low mortgage interest rates.
If a homeownerhas a jumbo mortgage, defined as a loan with a balance exceeding $417,000, there may be a variety of ways to refinance that mortgage take advantage of lower interest rates.For example, splitting the e into two loans—one at $417,000 with a 30-year fixed rate and a second mortgage that carries a slightly lower rate for a shorter loan period—oftentimes is an attractive way to take advantage of today’s lower interest rates.But each situation is unique, requiring specific financial planning decisions that take an individual’s circumstances into account.
One thing is certain: Now is the time to look at refinancing options, since interest rates cannot stay this low forever.The decisions borrowers make in one financial area usually impact several others. Before making any major money moves, it’s prudent to talk to a banking professional or a financial advisor to make sure you tak all the short- and long-term ramifications—and your financial goals—into account. What may seem like a good idea when only one area is considered can in fact be a very bad idea when look at the overall financial situation.
Joseph Chornyak Sr. is a Certified Financial Planner and managing partner of Chornyak & Associates. He can be reached at (614) 888-2121 or firstname.lastname@example.org.