When to Refinance… What Most Lenders Don’t Tell You!
Owning property is one of the biggest investments we make in our lifetime. This investment must work for us and not others. Most of us get a mortgage to buy property and then pay it off over time. In today’s market, rates have been well above the 20 year average by several percentage points and if you bought in the past 18 months, refinancing your mortgage could be a smart move. But, how do you know when to act and spend money on refinancing? Let’s break this post down into 3 sections: The variables in a mortgage and their importance; Situations one may consider outside of mortgage debt; and Tool to help you learn how to analyze your situation to make the smart decision.
Properties of a Mortgage
When people think about a mortgage, the first thing to comes to mind is the interest rate, but there are many other factors that one needs to consider in understanding the structure of a mortgage. Yes, the rate is king and the lower your rate the less you spend on borrowing money. There are other things you need to think about like the amortization schedule, the time it will take to pay off the mortgage. Most mortgages start on a 30 year amortization schedule, so you want to keep that schedule as best you can. If you are an educator in the beginning of your career, say 25 years old, and you buy your first property, with a 30 year mortgage, it will be paid off when you are 55 years old, the perfect age to own a property without a mortgage and begin forecasting one’s own retirement!
Now, let’s say you are 5 years into your mortgage and interest rates are 1% lower than what you initially got when you were 25. Simply refinance and reap the benefits of the 1% lower rate. The problem is that most people in the mortgage industry would simply reset the amortization schedule back to 30 years and provide an illusion of bigger savings, but it will cost you tens of thousands of dollars instead of true savings. Let me explain why. $250,000 at 7.5% = $1,748.04/month