Is this a good time to re­fi­nance your mort­gage?

Lodi News-Sentinel - - BUSINESS - Lodi’s Christo­pher Olsen is a cer­ti­fied fi­nan­cial plan­ner and pri­vate wealth ad­viser for Ameriprise. If you have any ques­tions for our panel of fi­nan­cial ex­perts, email News-Sentinel Edi­tor Scott How­ell at [email protected] or call 209-369-7035.

If you have a home mort­gage, it likely rep­re­sents one your largest monthly ex­penses. With in­ter­est rates on the de­cline, you may be won­der­ing if you could lower your home pay­ments by re­fi­nanc­ing the terms of your mort­gage. Here are some fac­tors to con­sider:

In re­cent months, mort­gage rates have moved sig­nif­i­cantly lower. The in­ter­est rate on a 30-year mort­gage dropped from 4.94% in Novem­ber 2018 to 3.49% in early Septem­ber 2019. That means a $300,000 mort­gage that would have re­sulted in monthly pay­ments of ap­prox­i­mately $1,599 (prin­ci­pal and in­ter­est) at the higher rate, will amount to roughly $1,345 at the lower rate, or a sav­ings of 16% on the monthly pay­ment.

If cur­rent rates are no­tice­ably lower than the rate you pay on your ex­ist­ing mort­gage, there may be an op­por­tu­nity to re­duce your monthly pay­ment. If you can ob­tain a mort­gage for an in­ter­est rate that is at least 1% be­low the rate you are pay­ing, it is worth in­ves­ti­gat­ing. The case to re­fi­nance is more ob­vi­ous if mar­ket rates are 2% or more be­low the rate on your cur­rent mort­gage.

It’s about more than in­ter­est rates

De­clin­ing rates are the pri­mary im­pe­tus to pur­sue re­fi­nanc­ing.

When those con­di­tions are in place, it also opens up op­por­tu­ni­ties to im­prove your longterm fi­nan­cial po­si­tion, de­pend­ing on the terms of your cur­rent loan. You may want to con­sider:

Re­fi­nanc­ing with a shorter-term loan. There can be sig­nif­i­cant cost sav­ings over the life of your mort­gage if you choose a 15-year mort­gage in­stead of the typ­i­cal 30-year mort­gage. Lower rates may make a 15-year mort­gage work for your bud­get.

Switch­ing to a fixe­drate mort­gage. If you hold an ad­justable-rate mort­gage, this may be a great op­por­tu­nity to lock in a low, long-term mort­gage rate with a 15or 30-year loan.

As­sess­ing the costs of re­fi­nanc­ing

There are dif­fer­ent fac­tors that might off­set the po­ten­tial ben­e­fits of re­fi­nanc­ing, de­pend­ing on your cir­cum­stances. For starters, re­fi­nanc­ing isn’t free.

Len­ders will as­sess a cost to the loan equal to ap­prox­i­mately 3% to 6% of the prin­ci­pal amount. So, with a $100,000 loan, costs could add up to $3,000 to $6,000. You want to be cer­tain your sav­ings in in­ter­est charges will ul­ti­mately off­set those fees. In some cases, len­ders may limit the fees charged, but in do­ing so, they typ­i­cally bump up the in­ter­est rate.

You’ll need to cal­cu­late a pay­back pe­riod on re­fi­nanc­ing — at what point will your in­ter­est sav­ings over­come any costs as­so­ci­ated with the trans­ac­tion. You should plan on con­tin­u­ing to own the home for at least that long to jus­tify re­fi­nanc­ing.

If you are far along on pay­ing off your loan (for ex­am­ple, with 10 years or less to go on your 30year mort­gage), start­ing over with a new mort­gage may not make sense.

Be­ing in a po­si­tion to pay off your mort­gage sooner rather than later may be ad­van­ta­geous to you.

As­sess your op­tions

Mort­gage re­fi­nanc­ing is an op­por­tu­nity to re­duce your monthly cash out­flow. You want to make sure your plans fit within your over­all fi­nan­cial strat­egy. Talk to your fi­nan­cial ad­vi­sor to be cer­tain you un­der­stand the full ram­i­fi­ca­tions be­fore mov­ing for­ward.

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