Considerations When Refinancing Your Home

Mortgage rates are dropping and they are at one of their lowest points in recent history. You may be thinking of refinancing your home, and for good reason. But before you begin the search process, reflect on the reasons why you are looking to refinance:

  •       Want a lower monthly payment?
  •       Want to expedite your home payoff?
  •       Looking to cash out equity in your home?
  •       Not sure what to do, it just seems like everyone else is, so you want to as well?

A trustworthy lender is going to want to know what you are hoping to achieve with a refinance because there are myriad of different ways to structure them, and the right solution for one person is not the right solution for the next.

For instance, take 2 couples. One is hell-bent on paying off their mortgage to own their home outright, while the other is looking to free up cash flow. For the person looking to pay off their mortgage, they are most likely willing to accept a higher monthly payment associated with a lower (10 or 15 year) term. More of each payment will go directly to principal, they will pay less in interest over the life of the loan, and they will have paid off the home quicker. The second person is looking for ways to reduce their monthly payment and free up cash flow. They can accomplish this with a 30-year fixed mortgage, knowing that they are adding additional years to their payoff date, but they like the lower monthly payment as this allows them to invest the remainder and possible earn a rate of return greater than their mortgage rate, and also provides flexibility in the event they need that cash flow for other purposes in the future.

As you can see, knowing the reason why you wish to refinance is the first step you need to take. Once you know why, your next step should be reaching out to 3 different lenders/independent brokers who can provide you with estimates for rates, terms, costs, points, etc. This will help you compare the options available and make the best decision for your needs. When receiving these quotes, it is advised to reach out if you have any questions or need additional clarification on items to eliminate any surprises at closing.

Lastly, have an idea of your future plans. If you plan to move within the next couple of years, run a breakeven analysis (usually determined by taking estimated closing costs and dividing by the estimated monthly savings to figure the number of months it takes to recoup closing costs) to see if refinancing makes sense financially. For example, if by refinancing you are able to save $150/month and your closing costs are $3600, the breakeven is roughly 2 years not accounting for growth ($3600/150=24 months), so if you plan to move before 2 years, it may not make sense.

If you are thinking of refinancing and would like assistance in seeing how this option integrates with your overall financial plan, please feel free to visit us at FivePoints Financial Planning and Schedule a time to talk.

Andrew Langdon is a fee-only financial planner based in Peachtree City, GA serving clients in the Greater Atlanta area.  FivePoints Financial Planning provides financial planning and investment management services to young families and pre-retirees who are looking to achieve financial freedom.  Services are offered on a project or ongoing basis.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.