The decision to purchase a home is often life changing, making a mortgage a big part of one's financial plan and often the biggest piece of debt. And, similar to the stock market, the economic landscape for lending is continuously changing, making it imperative for consumers to review their mortgage regularly.
With interest rates remaining near historic lows, many are considering refinancing their home to lower monthly expenses, assist with a long-term payoff or consolidate debt—essentially to put themselves in a better financial position. Yet reasons to refinance are not limited to interest rates alone, and the "right" time to do it may vary for each consumer.
To hone in on key refinancing considerations, I chatted with Vince Giacalone, a mortgage banker with Residential Wholesale Mortgage (RWMI). Below is our collective list of motivators and considerations for refinancing:
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What's Your Timeframe?
Before jumping into refinancing, determine your plan for the home: What is the estimated time you plan on owning the home? Is it two years? Is it 20 years? Determining that timeframe will help dictate the appropriate loan program for you and help you choose either a short-term or long-term hold strategy.
As Giacalone puts it, "friends don't let friends pay points." In other words, paying points to obtain a mortgage only benefits the consumer in specific, long-term scenarios. So, have a good understanding of your timeline before you refinance.
Know Your Motivators
What is your specific reason for refinancing? Is it to obtain the lowest possible rate, to protect the loan over the long haul or to improve your monthly cash flow? Or are you considering home improvements? It's important to determine the motivation prior to making the move. In a low-interest-rate environment, some consumers may see immediate monthly savings and opt to refinance for that reason. Others may use a cash-out refinance to build an addition to the house, consolidate their debt or invest the money elsewhere.
Interest Rates
Interest rates aren't the basis for a refinancing decision, but they can certainly play an important role. With current interest rates near historic lows, consumers may be taking a closer look at their statements and assessing where they stand. "Taking the mortgage temperature can either show consumers they are well positioned or serve as a wakeup call," says Giacalone. As each scenario is specific to the person, the refinancing decision should be made based on all aspects of the interest-rate environment.
Similar to the decision-making process involved in the original purchase, it's important to review one's reasons for refinancing and whether it's the right time. Personal situations vary, so be cognizant of your motivators and goals before refinancing your home.
Taylor Schulte, CFP® is founder and CEO of Define Financial, a San Diego-based fee-only firm. He is passionate about helping clients accumulate wealth and plan for retirement.
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