Thinking about a mortgage refinance on your house? As much as it drives me crazy to get a new loan, with the interest rates at an all time low, we really have no choice but to consider refinancing our home loan, right?
That’s all well and good, but don’t make the dumb mistake that I made whenever I got a mortgage refinance.
Quite frankly, even with the current low interest rates, I was ignoring the possibility of refinancing my mortgage, until we got a ‘looks too good to be true’ letter in the mail about refinancing one our investment houses.
Rats! Now we needed to consider a refi.
Let’s break it out before the interest rates start climbing back up again.. And they will, you know! Remember when 6% interest was considered to be good? Heck, we got a 9% interest on our first house and were thrilled about it. So don’t fool yourself thinking that these ridiculously low mortgage rates will last forever. Trends turn.
First, a disclaimer: I am not licensed. I am not an expert. Hopefully this article will get you thinking about if you should do a mortgage refinance… and avoid my past mistake! Consult with a professional before making a decision.
Whew.. now that that is out of the way.. let’s move forward. There are two key points to consider.
Mortgage Refinance – Point 1
How much is it going to cost? In the past, refinancing your mortgage cost as much as it did to get the original loan.. Not necessarily true today.
But you still need to know pretty much the exact cost to obtain a new mortgage. Mortgage companies tend to classify the costs under a whole variety of names. It they state your closing costs will be… let’s say $3000… you still need to dig a little deeper. Let’s pretend you currently owe $200,000 on your mortgage. Ask what the total costs are to get the refi.. don’t say ‘closing costs’, but ‘total costs.’
If they still say $3,000 I ask one more time but it in a different way like: “You’re saying that if my mortgage is $200,000, and the closing costs are $3,000, I don’t bring a penny to closing, AND my mortgage will be $203,000 plus the better rate?”
My point here, is that it’s imperative to get the true (total) costs for the mortgage refinance so you can make an informed decision about what is best for you.
I’m including a home loan calculator so you can do a little figuring, because once you know the cost to get the new loan, you still need to know if it’s to your benefit.
You’ll also want to know the break-even point of adding the closing costs to your original loan.
For example, if the closing costs for the refi are $3,000, and you’ll start paying $150 less per month, it will take 20 months (3000 div. by 150 = 20) before you actually break-even.
After this break-even point, you’ll benefit for every month you live in your home. So if you’re planning to be in your home for a minimum of 20+ months, a mortgage refinance might be a good idea.
But, wait! Not so fast, because there is one more piece of the puzzle.
Mortgage Refinance – Point 2
How many years are added to your new loan? Dumb mistake alert! Most people don’t even consider this. They simply base their decision off the break-even point. Big mistake! Let me tell you why.
Say you started with a 30 year mortgage and now you have 23 years left to pay on it. So you go out and get a new 30 year loan. Do you see where I’m going with this? Adding 7 years to the life of your mortgage is probably not going to save you money in the long run.
So what should you do? How about a new 20 year loan? Or even a 15 year mortgage. Check out refinancing here.
The embarrassing fact is that while my husband and I are in the business… investing and building homes almost our entire adult lives… we didn’t figure this out until a few years ago. Can you believe it? We should have known better! And it cost us big time.
If you want to learn from our mistakes, I highly encourage you to consider the length of your new mortgage.
Ideally, you want to reduce your monthly payment AND the time left to pay on the loan. Quite frankly, with the interest rates where they are at the time of this post, that may very well be possible!