Refinance offers have poured into your mailbox over the past year, and you probably know several people who already refinanced their own homes. So should you join in? Or is now actually a beneficial time to refinance your mortgage? What about cashing out your equity?
Maybe not, due to the following four factors…
Mortgage rates aren’t that low right now. In January 2021, mortgage interest rates fell to an historic low of 2.65 percent. Today, those rates hover around 5.5 percent.
Of course, if 5.5 percent is considerably lower than your current interest rate, refinancing might still benefit you. Generally speaking, you shouldn’t even consider a refinance offer unless you will lower your interest rate by at least .75 percent.
Accessing your equity could result in a larger monthly payment. If your goal is to refinance in order to access the equity in your home, today’s higher interest rates combined with a larger mortgage balance will likely increase your monthly payment. And that’s a chunk out of your budget that could probably be better spent elsewhere.
Refinancing resets the amortization schedule on your loan. You might already know that more of the interest you pay on a mortgage is packed onto the front end of the payment schedule. So not only will you add years of payments (unless you refinance into a shorter loan term than you currently have); you will also “start over” in terms of your amortization schedule. This means paying more interest to the bank, and less of each payment will go toward the principal balance on the loan.
Home prices might fall in the near future. Housing prices have skyrocketed, but are unlikely to remain that high forever. So if you mortgage the full value of your home, you could end up “upside down”, owing more on the property than it is even worth. That could become a problem if you need to sell in the future.
Of course, every situation is a bit different, and there might be some good reasons to refinance at this time. If you’re trying to decide whether a refinance would benefit your long-term financial situation, let’s discuss this decision at our next appointment.