Contributed by: Nick Defenthaler, CFP®
FIVE years ago we all heard that, “Interest rates won’t be this low for long!” Maybe someone told you to, “Hurry now!” to purchase or re-finance a home? Well, fast forward to 2015 and 30 year mortgages are hovering at about 4% depending on your credit score, slightly lower than what there were back in early 2010. It’s pretty incredible to think how long we’ve had such a favorable interest rate environment for homeowners. Rates have come down even more since the beginning of this year and we’re hearing about the drop more and more in the media. If you’re thinking about re-financing your home, below are a few items to consider before going through the process:
How long will you be in the home if you’re planning on re-financing?
Sure, lowering your rate is great, but will you be in the home long enough for the interest savings to justify the closing costs of the loan (typically around $2,000 – $3,000)? The typical rule of thumb is about 3 years, so if you plan on moving a year after you re-finance, it most likely makes sense not to make any changes.
Just like investing – don’t try to “time” interest rate changes
Rates can fluctuate dramatically in a short period of time. Over the last few years we have seen a great deal of volatility in mortgage rates. I believe a 30 year mortgage around 4% is a phenomenal borrowing rate, don’t get greedy and try to hold out to save .25% because you think you know what direction rates are going. We’ve seen this happen before and rates have increased and clients have missed opportunities to lock in historically low mortgage rates.
Consider combining into one mortgage
Many folks have two mortgages on their home. The primary is typically the initial mortgage they took out when they bought the house and the second is often times a home equity loan or home equity line of credit. I recently met with a couple who was paying almost 5% for their primary loan amount and almost 7% for the home equity loan! My eyes got big when I saw these figures because I knew immediately this was a planning opportunity for them. They had no plans to move in the near future. The couple was able to re-finance into one, fixed rate mortgage and they should save thousands in interest. Plus they should pay their home off about 3 years sooner than they would have with their prior mortgages.
Think you’re still “underwater”? Think again…
Coming out of the recession, many homeowners were unable to re-finance because their home was “underwater” – meaning what they owed exceeded their value. Although there were some federal programs that helped these types of individuals, not everyone fit the mold depending on loan guidelines. Some folks are just now seeing their home values exceed their loan balances. Home prices have risen quite a bit in most areas and you might be surprised at what your home is actually valued at now. Don’t just assume you can’t re-finance because of your perceived loan to value ratio. Reach out to your loan provider and get their take and see what your options are.
We always encourage clients to keep us in the loop when deciding to go through with a refinance. We can be the second set of eyes to make sure, first and foremost, that your needs are being put first and that your personal situation and goals are taken into account when making these big financial decisions. Please don’t ever hesitate to reach out to us if you’d like to run the numbers past us!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional.