5 Questions to Ask Before Refinancing a Mortgage

October 26, 2016

As long-term interest rates remain at near-historic lows, it seems like everyone from casual acquaintances to close relatives has an opinion on how far rates have to drop before it make sense to refinance. With so many different points of view, how does one make a decision that’s right for them? We’ve come up with 5 questions to ask yourself in order to decide if refinancing your home mortgage is right for you.

Why am I thinking about refinancing?

Hint: “Because rates are low” is not an acceptable answer. However, if you are you looking to consolidate higher-interest debt, lock in a fixed rate on an adjustable rate mortgage, reduce your monthly housing expense or knock 10 years off your term, you are on the right track.

How long have I had my existing mortgage?

This may seem counter-intuitive, but to some extent, the shorter you have had your existing mortgage, the less rates have to drop for refinancing to make sense. In the beginning stages of an amortizing mortgage, the majority of your payments are going toward interest and very little is going to the principal. If you’ve had your current loan for 15 years (assuming it was originally a 30 year mortgage), a good portion of your total payment is now going toward principal and it may not make sense to refinance.

How long do I plan on keeping this mortgage?

When answering this question, you need to distinguish between how long you plan on living in the home vs. how long you plan on keeping your current mortgage. Upon your next move, if you see yourself turning your current home into a rental property, the mortgage may outlast how long you actually live in the property.

What other debts do I have?

If you have debt besides your mortgage (car loans, student loans, personal loans, credit cards, home equity loans, etc.), you should decide if it makes sense to pay it off with the proceeds of a refinance. The amount of other debts you can consolidate into the new mortgage will be dependent on the equity in your home. However, the rates on fixed-rate mortgages are pretty likely to be lower than the interest on the other debt, so you may have the opportunity for huge savings.

Do I have any major expenses coming up over the next 3-5 years?

If you know that you will soon be borrowing to pay for a major expense, (children going to college or getting married, purchasing a new car, major home renovation), then consider whether it makes sense to borrow that money now and put it in a “rainy day” fund for a predictable future expense.

Once you’ve answered these questions, contact a professional Mortgage Expert who can review your financial strategy and objectives to find out if refinancing is right for you.