Texas Border Business
As originally published by Texas Border Business newsprint edition May 2018
By Taylor Kovar
Hey Taylor – My family is five years into a 30-year mortgage at 6.25% with a balance of $215,000. Would now be a good time to refinance my mortgage?
Hey Martha – My recommendation would depend on your goals for refinancing. Most people refinance their home for one of two reasons: to save money or to do a cash-out refinance.
A cash-out refinance is used to pay off other debts with higher interest rates or to finance a large purchase, like college tuition or a remodel. I generally discourage this kind of refinance. Converting unsecured credit card debt to secured debt against your house may add years to your debt repayment and increase your risk. Not to mention, it might not save you all that much in the long run.
Many homeowners begin to consider refinancing a few years into their mortgage when their credit scores or property values have increased and/or when their debt-to-income ratios and interest rates are lower. As I write this, the 30-year fixed-rate mortgage is benchmarked at 4.49% and the 15-year at 3.89%, which is lower than your current 6.25% interest rate. It sounds like a great time to weigh your options.
As a word of advice, aim to refinance for a shorter term than the remainder on your current mortgage. In your case, 25 years or less. If you take out another 30-year loan, it could end up costing you more in the long run and drag out your repayment. A 15-year will qualify you for an even lower rate, save you tens of thousands over the life of the loan, and you’ll pay it off even sooner. As a tradeoff though, it may not reduce your payment much and could even increase your current monthly payment.
Besides interest, refinancing can also save you money on insurance. If the equity in your house is more than 20%, you can remove the private mortgage insurance. When weighing your options, compare your closing costs, interest rate, and term to calculate total costs for the life of the loan and each option’s breakeven point. If it’s 18 months away, do you plan on remaining in the house that long?
Remember, payments are minimums – you can always make larger payments to pay off the principal balance at an accelerated rate, with the flexibility to drop your payments back down to the required amount if needed. Markets, property values, and life itself are very unpredictable so even though I don’t know all of the details about your situation, I would definitely recommend you speak with a mortgage lender as soon as possible to see if taking advantage of lower rates would benefit your family. Good luck!
