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Refinancing: The Bottom Line

With interest rates at record lows, refinancing has been viewed as a slam-dunk in recent years. But just because everyone else is doing it doesn’t mean that it’s right for you.

Fixed vs. Variable Rates

Your current mortgage is either fixed (meaning your mortgage payments don’t change when interest rates rise or fall) or variable (your payments fluctuate depending on the direction of interest rates). Here’s how that may affect your decision to refinance:

  1. You may have purchased your home years ago when interest rates were much higher, meaning refinancing will likely lower your payments.
  2. If you financed your home at a variable rate at that time (generally lower than the fixed rate offered concurrently), you were in luck: interest rates have dropped significantly. You’ve already saved substantially and may not save much more by refinancing.
    Even so, it’s not an either-or situation: Refinancing will allow both homeowners to lock in the current low interest rate. And it can allow both borrowers to pay off the loan more quickly; say, with a 15- rather than a 30-year mortgage.

Is It Worth It?

Refinancing is just another name for applying for a new mortgage, and there are similar costs incurred. Even if it sounds like you’re going to save money by refinancing your home, look at all the factors before going forward:

  1. The back-of-the-envelope calculation is that refinancing doesn’t pay unless your current mortgage is at least one point higher than the current market rate.
  2. Banks have been much tougher about approving mortgages following the collapse of the housing market and the financial crisis that ensued.
  3. Even with a hard-working mortgage broker pushing through your transaction, it takes time. These days you can count on an extra-long process as banks check and recheck your qualifications.
  4. Even if your credit is pristine, it won’t help if your house is “under water,” meaning your current mortgage is more than the appraised value of the property.
  5. Figure out how long it will take you to recoup your closing costs (usually 3-4% of the mortgage. If you’re planning to move within a couple of years, you may not break even on the lower cost of the refinanced mortgage).
  6. Those in a higher tax bracket must consider the effect on taxable income when lowering the mortgage portion of deductible income.

There’s no doubt that refinancing has been a boon to many in the past several years. But look at it through your own lens before going ahead with it.

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Gerstein Fisher
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