Is right now the best time for you to refinance? Let’s discuss that.
When it comes to refinancing, too many people get caught up in the numbers. Many people who currently have a rate of 3.5% see that interest rates have dropped to 2.7% and think that they need to refinance even though they haven’t considered what will happen in the long term.
A good rule of thumb is that refinancing doesn’t make sense unless it’s at least a two-point spread. Many lenders will refinance you at any number; they’re just happy to do the loan and make money.
If you’ve been in your loan for a long time, you’re making more principal payments than interest, and if that spread is less than two points, you’ll want to think hard about why you’re refinancing because doing so will lengthen the life of your loan and add costs to it. You might think that it’s a great thing because your monthly payments were reduced, but in the end, you’re going to end up paying more.
Sometimes when you’re considering what the difference in payment is when refinancing to a lower rate, you’ll find out that you won’t get that much cost savings.
So before you consider refinancing, ask yourself:
- “How long do I plan to live in the house?” If you’re planning to move in a few years, it makes no sense to refinance.
- “How long have I had the loan?” If you just got your loan at a rate of 4% and plan to live in the home for another five to seven years, it might make more sense for you to refinance.
Also, there are tricks to paying off your current loan faster. By making just one extra payment per year, you’ll knock almost 10 years off the life of your loan. You could also consider refinancing from a 30-year note to a 15-year note if you want to pay it off sooner.
Hopefully, these tips put the concept of refinancing into a better perspective for you as you navigate the market. If you have any questions about this topic or need some help analyzing your situation, don’t hesitate to reach out to us. We’re here to help.