We have all heard that now is a good time to refinance a home. Is this truly a fact or is it like a mattress that’s on sale every single day? The reality is every person’s scenario is unique. While it may be highly beneficial for someone to refinance, it may be counterintuitive for another. So if you’re considering whether refinancing (with a mortgage company) at this moment is good for you or not, below you can find some key points to determine if it’s your time to refinance!
What Are My Goals?
You might be asking yourself, “Why did they start with goals? Aren’t interest rates the biggest factor in making a decision?” Not exactly.
While interest rates are an essential component in the equation, it should not the “be-all and end-all” factor that many mistakenly use to make their refi decision. There are many factors that go into making this important decision, such as:
- Are my kids going to be going to college soon?
- Is a downsize best for me or are we planning to expand our family and need more room?
While those are two simple questions that you can ask yourself to give better insight and direction for upcoming changes you can consider additional needs like home improvements, emergency cash reserves, and basic monthly cash flow budgets. On top of that, you should also consider your credit score and loan-to-value percentage.
So What About Interest Rates?
When thinking about refinancing your home, a simple “interest rate only” perspective doesn’t capture all the potential reasons to refinance and you could miss out on the benefits!
For example, say your current mortgage interest rate is 3.25% and today’s offered rate is 4.25%. There could be significant benefits for a homeowner to refinance even with a 1% or higher increased interest rate. Auto loans, student loans, credit card debt, and savings plans all play a significant role in determining what constitutes as beneficial.
When factoring in additional debts that contain higher interest rates, many times you’ll see that by eliminating those debts into a safe, secure first mortgage it can provide a significant increase in cash flow that can be used to reduce mortgage term saving by tens, if not hundreds of thousands of dollars over the life of the loan. On the other hand, you could simply have the ability to enjoy life a little more by managing a monthly budget and cash flow to suit your specific needs and/or goals.
How the Housing Market Plays a Role
Another point to consider is the fact that our country and more specifically our state has seen significant equity increase over the last nine years. Colorado has seen an appreciation rate of over 53% in the last five years alone. Coloradans are second in the nation when it comes to the amount of appreciation during this time period. Many homeowners have seen their wealth increased by $50,000, $100,000, and even more than $300,000 in just the last five years alone.
With this new found equity, there are additional components to look at such as the removal of mortgage insurance. If your credit has improved, you could have the opportunity to get a lower rate over your current mortgage. Similar to the stock market, house prices overall will continue to rise but there are definitely cycles where there are corrections and price declines which will occur. Lastly, you should consider whether you are able to lock-in at the presently high elevated valuations to protect your new found equity from loss due to a market correction down the road.
We hope that this has been helpful in thinking outside of the “solely interest rate focus”. There are a variety of factors to consider when making a decision as important as refinancing your home. If you have specific questions that were not addressed above, please feel free to reach out to one of our expert personal mortgage advisors who can help answer them for you.