The following is a guest post…
In an age when everyone is trying to save on their monthly expenses, many households are turning to becoming one car households or downsizing their homes to save. Others who are unable or unwilling to move are looking to lower their monthly mortgage payments through a mortgage refinance. However, choosing to refinance your mortgage isn’t always in your best interest – depending on your financial goals.
While refinancing your mortgage can save you each month, there are two things that you want to watch out for when choosing to refinance: closing costs and interest. A refinanced mortgage, just like an initial mortgage, requires that you pay closing costs when you secure it. These fees are usually a couple thousand dollars – which can be a substantial amount for anyone worried about pinching pennies.
Interest should also be another concern for anyone considering a refinance, and not just the rate in which they are trying to refinance under. When you refinance a mortgage, you refinance an entire mortgage – including the interest already accrued. So if you are choosing to refinance your mortgage after being in it for 10 years, you may find yourself paying interest on a large amount of already accrued interest – something you don’t want to be doing when you are trying to save money overall.
So when is the best time to refinance your home? You should choose to refinance your home early in your mortgage, to reduce the amount of interest you’ll be paying on already accrued interest, and only if the mortgage rates have dropped significantly. If the interest rate you will be obtaining is less than one percent lower than the one you already have, then wait to refinance until rates drop even lower. Otherwise, the money you will be spending in closing costs will negate any savings the lower interest rate would have brought you.
If you have a mortgage loan as well as a home equity loan, choosing to refinance both loans into one under a lower mortgage rate is also a great idea. This will allow you to take two high payments, turn them into one, and pay less interest overall.
Everyone is interested in saving a buck these days. But before you dive into a refinance, make sure that it is the right financial decision for you. Otherwise you may find yourself without the savings you desired, and a high closing cost bill instead.
I’ve never liked the “you must cut your rate by 1%” rule of thumb. I’ve seen a number of refi’s that didn’t fit within that guideline and were extremely beneficial.