When a Mortgage Refinance Makes Sense and When It Doesn’t
Refinancing your mortgage can be a powerful financial tool, but it’s not a one-size-fits-all solution. Knowing when it makes sense and when it doesn’t can save you money and help you make the most of your home’s value.
There are many reasons to consider refinancing, from carrying debt due to unexpected financial duress, health issues, or lost income to planned refinancing for home renovations/upgrades.
When Refinancing Makes Sense:
Lower Interest Rates If current interest rates are significantly lower than when you first took out your mortgage, refinancing could reduce your monthly payments and save you thousands over the life of the loan.
Accessing Home Equity Need funds for renovations, debt consolidation, or other major expenses? Refinancing lets you tap up to 80% of your home’s value, turning equity into cash.
Switching Loan Terms Want to pay off your mortgage faster? Refinancing to a shorter term can help you build equity quicker and save on interest. Alternatively, extending your term can lower monthly payments if cash flow is tight.
Consolidating Debt You can roll high-interest credit card or personal loan debt into your mortgage through refinancing, simplifying payments and potentially lowering your overall interest rate.
When Refinancing Doesn’t Make Sense:
High Closing Costs Refinancing comes with fees. These include appraisals, legal costs, and more. If you’re not planning to stay in your home long enough to recoup these costs through savings, refinancing may not be worth it.
Minimal Interest Rate Difference If the new rate isn’t much lower than your current one, the savings might not justify the effort and expense.
Resetting Your Mortgage Term Refinancing restarts your mortgage clock. If you’re already several years into your mortgage, this could mean paying more in interest over time, even with a lower rate.
Risk of Over-Borrowing While accessing equity can be useful, borrowing too much could put you in a tough financial spot if unexpected expenses arise or the market shifts.
There are many reasons to refinance or restructure your debt; however, in my opinion, the primary objective is to reduce overall cash outflow and interest costs.
One objection to refinancing I hear often is, "I don’t want to include this particular loan because there’s no interest being charged." Although this statement is correct, you still have the $500/month payment.
This is where people need to decide what matters more: an interest-free loan payment or cash flow.
As many of you know, I support a financial perspective of bulletproofing your lifestyle. The primary building block is savings gained by increasing your disposable income. The easiest way to achieve this is to reduce cash outflow.
Over the years, for most people, the cash flow outweighs the interest-free loan, as it has a bigger impact on creating disposable income, which may be used to increase savings or improve one’s lifestyle.
If possible and it makes sense, pull out extra funds to build savings and minimize reliance on credit cards. With increased cash flow, it’s key to improve disposable income while increasing savings to manage future financial shocks.
This is even more important when you become a homeowner, as you need to save for regular maintenance, appliance repairs/replacement, roof repairs, etc. Or you experience a health-related issue that affects your ability to work, and you need a cushion for a few weeks.
Regardless of the reason, being proactive is key.
If you have any questions about whether it makes sense to refinance, please feel free to reach out. I’m always happy to share my experience.
