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Refinancing your home can be a great tool for financial gain, but is it right for you? The number of people refinancing is at an all time high according to the FHFA and everyone is scrambling to see if they qualify and if it can benefit them financially. The truth is it can help or hurt you, depending on your situation and on how you refinance. The traditional understanding of a refi is that it simply reduces your interest rate, reducing your future monthly payments and the total cost of the mortgage in the end. This sounds like it could benefit everyone..right?
Like always, there are some finer details to be looked at and analyzed. Their are options where you can pay out a lump sum of cash to put your mortgage within range of jumping from a jumbo loan to a convention loan with a lower interest rate. This is a cash-in option. According to Freddie Mac, 47% of homeowners had refinanced their mortgage as of 4th quarter last year. Treating the mortgage as an investment vehicle can be extremely beneficial and save the homeowner a lot of money. If a homeowner pays in $75,000 when they refinance a $700,000 mortgage, they would save up to $5,900 every year based on a .33 rate reduction. To make these gains in a normal investment instrument, you would need to earn 7.5% interest on the money. There is another option where you simply refinance the rate if you qualify, but the closing costs can end up cutting into the post-refi savings and into a homeowner’s reserve cash. This has the potential to make it not worth the money for the homeowner to refinance.
However, if the homeowner does not have a solid amount of cash sitting around, it is probably not a good idea to refinance when you have to pay out a large amount of cash. This is called cash management and is extremely important to your short-term finances. You do not want to be cash poor when trying to save money in the long term. One solution that people miss is reducing the principle. For example, if you reduce your interest payments by switching from a 30yr mortgage to a 15yr mortgage, your monthly payments are still going to go up because you will have to pay more principle out to pay off the loan faster. While saving money in the end, you are giving yourself higher level of minimum financial obligation every month.
In this situation, a better option can be to simply make higher payments on a 30yr mortgage. You can always pay more than your monthly minimum. This way, your principle gets paid off faster, which cuts the amount of interest you’re paying. In taking this route, you are safer and have less obligations should you fall into dire financial straits, but your are saving money at the same time. This is a great option that a lot of people miss because they lack discipline to make those high monthly payments when not obligated to do so. In any case, many variables and conditions need to be considered before making a decision to refinance. It is definitely something that every homeowner should be looking into. Be sure to check the closing costs on your refinance with your bank and your Title Company and determine what is the right decision for you.
Nick Gagliardi
Social Media Project Manager
Advantage Title Company
Advantage Title Company 