Is It Time to Refinance Your Mortgage?
Your mortgage payments are likely the biggest expense on your list, but if your recurring bill is causing you a lot of stress, you should consider refinancing. By refinancing, you may be able to lower your monthly payments, but with interest levels skyrocketing, is now the right time to do it?
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The State of the Lending Industry
Due to staffing shortages and the lasting effects of the pandemic, most of the world is experiencing record-high inflation rates. As a result, mortgage lenders have increased interest rates on loans by nearly a full present from 2.84% to 3.75% at the start of 2022.
However, not every country is experiencing inflation in a similar capacity. Australians who compare iSelect home loan rates may find mortgages with only 1.80% interest per year.
When You Should Refinance Your Mortgage
Unless your interest rate is higher than 4%, homeowners are unlikely to find a better interest rate until the next economic crash. Since January 2022, the likelihood of you finding a less than 3% interest rate is slim to none, but there are ways to know if refinancing is still the right choice.
Generally, if refinancing your mortgage saves you money, pays off your loan faster, and helps you build equity, then refinancing is a good decision, even if you’re a new homeowner.
However, you can’t just compare your current mortgage rate with your new mortgage rate to know if you’ll save any money. For a more accurate assessment, calculate the following:
- The after-tax monthly savings
- The amount of time spent in the home
- The cost to obtain a new mortgage
Once you have answers to these questions, you can calculate your return to see if it’s in the green. Even lowering your interest payments by half of a percent may be worth it.
When You Shouldn’t Refinance Your Mortgage
Mortgage refinancing isn’t always the best idea, even when rates are low. Refinancing your loan can be time-consuming, expensive, and may affect your credit score. Before going through the long process of refinancing your loan, consider the following reason why you shouldn’t:
- To Consolidate Debt: Putting unsecured debt, like your credit cards, into your home could spell disaster if you can’t make your mortgage payment.
- To Get a Longer-Term Loan: Even with a lower interest rate, extending the term of your loan will almost always make you spend more money on the house over time.
- To Put Money Towards a New Home: If you’re moving in two years and it takes three years to recoup your losses from refinancing, you won’t save any money at all.
- To Switch From an ARM to Fixed-Rate: Switching from an adjustable to a fixed-rate mortgage can be a bad move if you don’t consider the ARMs loan index.
- To Take Money Out for Investing: Unless you’re a smart investor, you’re more likely to lose money on the stock market or make a lower ROI than you would by selling your home.
- To Get a No-Cost Refinancing Loan: A no-cost refinance is like a unicorn: it doesn’t exist. You’ll likely have to pay the closing costs with a higher interest rate.
In some cases, refinancing just to reduce your monthly payments can be a bad option.
The cost to refinance a home can range from 2-3% of your home loan, meaning high-cost loans will be more expensive to refinance. If you’re 10 years away from paying off your mortgage, extending your loan, even if you cut the interest rate down by half, will cost you much more.
On top of that, you’re now shackled to your current loan for much longer. A refinance can also affect your total net worth, which may prevent you from getting other loan products in the future.
