Is a Refinance is Worth Your Money and Time?
Tips to Know When to Refinance Your Mortgage
A Lower Mortgage Rate May Not be Worth It
Many people refinance believing that a lower interest rate will save them money. Often, they never benefit from a lower rate. Of course, there are good reasons to refinance other than getting a lower rate (covered in another article), but first, let’s discuss how to analyze the payback on a refinance. I help my clients create and preserve wealth, so I don’t advise them to refinance unless we can justify it.
Focus on Total Cost, Not Interest Rate
The most important concept is that a low mortgage rate, alone, means nothing until you know the cost of that rate. All loans have transaction costs and fees which could offset the advantage of a low interest rate. So, get the rate out of your mind, and instead focus on the lowest overall cost of the loan over the time frame that you will have it. A Certified Mortgage Planning Specialist® (CMPS®) can provide a Total Cost Analysis to show how the savings over time may offset the costs.
Know Your Payback Period
Most people don’t realize that the average mortgage is kept for only five to seven years. People refinance, get promoted, lose jobs, become self-employed, relocate, renovate, upgrade, marry, divorce, give birth, children move out, parents move in—any of these could trigger mortgage changes. Unless you absolutely will keep a mortgage for 30 years, you must know your payback period. I advise my clients to target a payback within 18 months. Work with a CMPS® to calculate your cash flow and payback period and you’ll know the rates and costs that justify your time and money. Then you can decide how to proceed.
Have Your Mortgage Advisor Track the Market for You
Current rates are higher than in the recent past, so these days, refinancing to a lower mortgage rate is not an option. Through the analysis above, my clients set a target rate; when the market hits that point, they authorized me to proactively contact them to refinance, so I do the rate watch for them.
Make an informed decision on your refinance and you will truly benefit.
About the Author - Kabir Mahadeva
Kabir Mahadeva helps clients to create and preserve wealth by integrating their mortgage with their overall financial plan. As a Certified Mortgage Planning Specialist®, he is one of a very select number of professionals who have earned advanced certification in assisting clients to achieve financial goals including funding retirement, paying for college, optimizing cash flow, reducing tax costs, and increasing net worth. Click here to read more about Kabir Mahadeva.
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