Should I Refi?

When you need cash now for a major expense, it might be tempting to tap some of the equity you’ve been saving up in your home.  But before you decide on a cash-out refinance, home equity loan or home equity line of credit, consider these reasons why it may or may not make sense for your situation.


Reasons Why Refinancing Makes Sense

For those still debating whether or not they should refinance, here are 3 reasons why it might be the right move for you:

To lower your rate.

One of the most common reasons to refinance a home loan is if you originally financed at a much higher rate than what is now available today. If you haven’t refinanced in a while, discussing the current rates with Matt Chao will only take a few minutes of your time, and may save you thousands over the course of your loan not to mention free up substantial dollars in your monthly budgeting.

To reduce your term.

If you’ve been making payments on a 30-year loan, it might be worth looking into options for shortening the term to a 15-year loan. In many cases, 15-year interest rates are more favorable since you are committing to pay the loan off sooner. A 15-year loan is typically the best way to pay off your loan quickly and you pay less in interest over the life of the loan.

To switch from an adjustable rate mortgage to a fixed rate.

Although much less popular now, adjustable rate mortgage loans were once a highly sought after commodity when interest rates were pushing double digits. In today’s lower interest rate environment, locking into a fixed rate from an adjustable rate could provide you with financial security before potential rate hikes.


Reasons Why It Might Not Make Sense

While refinancing can be a help for many, it is not always the best long-term move. Here are 3 reasons why not to refinance:

Your Payments Apply More to Principal Than Interest Now.

The amortization chart below created by the Federal Reserve Board shows that the amount of your payment that is credited to the principal of your loan increases each year, while the amount credited to the interest decreases each year. If you’ve had your mortgage for a long time, you are at the stage when more of your payment applies to principal and helps build your equity. If you were to refinance late in your mortgage, you will restart the process all over again, and most of your monthly payment will again be credited to paying interest and not to building equity.


Amortization of a $200,000 loan for 30 years at 5.9%

amortization chart


A prepayment penalty would negate your savings.

A prepayment penalty is a fee that a lender may charge if you pay off your mortgage loan early, including for refinancing. While most mortgages these days do not carry a prepayment penalty, be sure find out if your current loan does and if the penalty can be waived in certain circumstances.  Carefully consider the costs of any prepayment penalty against the savings you expect to gain from refinancing.

You are thinking about moving.

The monthly savings you would gain from lower monthly payments after a refinance may not exceed the actual costs of refinancing. Use this break-even calculation to help determine whether it is worthwhile to refinance now before the big move.

As always, I’m here for help. I love answering questions specific to your situation and will guide you to the best decision for you after we weigh the pros and cons together. Call me anytime at 619-577-4030.