Refinancing your home is a big decision to make—and while interest rates are at the heart of it, they don’t make up the whole picture. Joshua Feldman, senior mortgage loan officer at SunTrust Mortgage, provides insight into how you should evaluate the current interest rate environment, as well as your values and financial goals, when trying to decide if and when refinancing is right for you.
How can refinancing help people reach their financial goals?
Refinancing your loan can potentially help you lower your payment or change the life of the loan. Maybe you want to pay off the loan faster so you don’t have to worry about it when you retire, or maybe you want a longer-term loan, which would provide the flexibility of a lower monthly payment to spend or save your money in other ways.
A cash-out refinance may be an option for some to turn equity they’ve built in their house into cash that can be used to fund a big expense, like a home improvement project or a child’s college tuition.
How would you describe the current interest rate environment?
The general feeling is that interest rates are going to continue to rise over the next 12 months. When the stock market is doing well and the economy looks like it’s headed in the right direction, rates tend to move higher. So while I do think we’re still at a low point comparatively to what rates were 10 or 20 years ago, rates are on the rise. That said, one product of a strengthening economy is that home prices are also on the rise. As values appreciate, people may look for opportunities to leverage that newly accumulated equity in their home.
How does that outlook play a role when people are deciding to refinance?
If your primary goal is to lower your payments, it makes sense to think about refinancing when the current interest rates are lower than the rate you currently have. Homeowners will also want to look into what closing costs would be, to make sure the interest-rate savings would offset the necessary upfront cash.
If you’re looking to shorten your loan term, say going from a 30-year loan to a 20-, 15- or a 10-year loan, those rates are generally going to be lower than a traditional 30-year-fixed in most interest rate environments. This change can save you money in the long run.
When might it make sense to refinance to a higher interest rate?
There are other reasons unrelated to the rate environment that cause people to consider refinancing. A lot of people who call me now are six or seven years into an adjustable rate mortgage (ARM), and if they were to refinance, they would be refinancing to a higher interest rate. If they are going to be in that house for the foreseeable future, then I absolutely would consider refinancing to a fixed-rate loan, so they don’t have to worry about the rate adjusting every year.
Another time you may consider refinancing to higher rate is to consolidate high interest debt for overall interest savings, one easy payment and a better tax deduction. However, you should consult a financial advisor for advice regarding tax details and the advisability of converting other debt into debt secured by your home.
Why is it important to talk with a mortgage lender when considering refinancing?
You may have an idea of what you’ll accomplish by refinancing, but a mortgage lender can help you weigh all the pros and cons to help you decide if a refinance really makes sense for you. They’ll ask you questions to understand your goals and motivations, like how long you’ll stay in the home, and they can help you find a breakeven point where a refinance makes sense.
Looking at a calculator online is just one small piece of the puzzle. You really need to talk to someone so you understand what’s important and how your financial goals play a role.