With capital markets reeling from anticipated economic effects of the coronavirus and the plunging price of oil, a potential money-saving opportunity has emerged: refinancing your mortgage.
As concerns over the economy force investors to lower risk in their portfolios, they do so by selling stocks and buying low/no risk securities, such as 10 Year Treasury Notes. That demand has driven up prices and driven down yield…to historically low levels. Since those yields play a significant role in the interest rate charged by lenders, we are also seeing historically low mortgage rates.
The benefits of a lower mortgage rate are clear: lower monthly payments, less interest paid over the life of the loan and potential elimination of mortgage insurance. While it may seem like a no-brainer to take advantage of lower rates, you should weigh your unique factors before making the decision.
Here are some points to consider:
- The costs associated with refinancing can add up. Registration fees, attorney fees and the appraisal are but a few examples. You may also have to prepay interest and escrow accounts. Therefore, it is important to compare the cumulative savings on monthly payments against the costs. Generally speaking, the longer you expect to service the mortgage, the better your chance to recapture the costs of refinancing.
- While refinancing may lower your payment, you may still pay more in total interest if you replicate the terms of your current mortgage. For example, if you have 20 years left on your existing mortgage but refinance to a new 30-year term, your total interest cost may still increase due to the five years added to the new mortgage.
- Conversely, reducing the loan term to 15 or 20 years decreases interest paid over the life of the loan, but may increase monthly payments. Even if you are comfortable with a higher payment now, it’s important to consider whether you’ll be able to accommodate that higher payment over the term of the loan should your financial picture change due to loss of a job, development of a chronic health condition or loss of an income through divorce or death of a spouse.
- If you’re thinking of starting a business, seeking ways to finance a child’s college education or have other reasons that may potentially cause you to tap into your existing home equity for financing, it may not be worth the disruption to re-finance your existing equity.
If you’re wondering whether the time is right for you to re-finance, talk to your CornerCap Wealth Advisor to review the specifics of your situation and impact on your overall financial picture.