Few words make an adult queasy like the word mortgage. Many homeowners have horror stories about unfavorable mortgage loan terms that put them in a bind as they tried to buy their own home or make investment purchases.
Thankfully, we are not handcuffed to the terms of our mortgage should they be less than favorable at the start. In 2021, nearly 25% of homeowners reported refinancing their mortgages – a number that is heavily influenced by the federal interest rates at a given time. So, when is the right time to strike on a mortgage refinancing? Here are three times and factors to consider refinancing your loan terms.
- When You Need to Lower the Interest Rate
You wouldn’t generally refinance your mortgage if you sign your loan at historically low-interest rates. This would defeat most of the purpose of refinancing as you would already be at an interest rate well below anything you would receive on updated terms.
When you have a high-interest rate on your mortgage, however, taking the opportunity to refinance once rates are much lower could save you significant capital. Re
financing your mortgage will come with additional costs to consider, though, so you won’t automatically save money unless the savings outweigh those additional costs (such as closing costs).
Even if the rates are similar, you may be able to save money on your monthly payment by extending your mortgage term. This can come with more long-term costs but it at least gives you more breathing room on a monthly basis.
- When You Need Liquid Cash
A cash-out refinance is a popular means to get liquid cash using the equity in your home. In this scenario, you are taking advantage of the increased value of your home by getting a mortgage at a higher principal balance than your initial loan – giving your excess cash to use for purchases or paying off debts.
For instance, say you want
to purchase a car but do not want to take out an additional loan, refinancing your home and using the equity to cash out and buy a new car can be advantageous. However, this almost always means you will have a higher balance left over after the refinance so be prepared for increased monthly payments and/or a longer term.
- When You Want to Shorten the Term of Your Loan
The longer you are paying a loan the more interest you will pay. This means you are giving the bank far more money than the value of the loan (which is how the banks make their money). For simple math, say the bank gives you a $500,000 loan at a 5% interest rate – if you make payments on time for a 30-year term you will ultimately pay $966,240 (not including taxes and fees) before the term ends.
Interest rates on 15-year mortgages are much lower, but the monthly cost is often prohibitive for families. However, if you have made significant advances in your career and have more cash to spend then shortening the term of your mortgage could save you significant cash to be used for retirement or even to leave for your kids.
At Schlegel Livingston, we work with clients to help them make the right choices when considering a mortgage loan refinance. If you and your family are considering changing the terms of your mortgage, contact us and get expert advice during one of life’s most important moments.
Schlegel Livingston LLC
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