When someone talks about refinancing a mortgage, they immediately think of the next benefit: fewer monthly payments with low interest rates. That should only be one of the main purposes; no one in their right mind would refinance any debt for a higher interest rate than they handle. However, speaking of a home loan, although an interest rate percentage point can mean thousands of dollar savings, in reality this It depends on the period you have with your mortgage and how long you plan to live in your property to take advantage of it.
Refinancing a mortgage is an option that is given to a person to continue paying for their house and obtain two possible benefits independent of each other: pay cheaper monthly payments or have a shorter period of time.
Since the coronavirus pandemic reached the United States, benchmark interest rates fell to 0%, which caused mortgage interest rates to reach historic lows, becoming a excellent opportunity to refinance, though with their respective considerations.
Reasons to refinance a mortgage
The most popular reasons to refinance a home loan are:
1. Reduce monthly payment: if for some reason and without taking into account the time you have already been paying your mortgage, you do not have the necessary solvency to continue paying the same month to month, you may find that the current interest suits you, even if it is for the same time span. This type of option is convenient when you have not been on your mortgage for a long time.
2. Change variable rate for a fixed oneAlthough variable rates are rare in the US market, if you have a mortgage of this style it can cause you to pay high monthly payments, so refinancing at a favorable fixed rate keeps your deposits from changing month by month.
3. Pay mortgage faster: If your economy improves and you think you can increase your deposit, you may want to shorten your mortgage period. That is, if your current loan has a 30-year period, you can refinance it for 20 or 15 years, however, you must consider that your monthly payment will increase considerably.
4. Leverage equityWhen you refinance to borrow more than you owe on your current loan, the lender gives you a check for the difference. This is called cash-out refinancing.
However, although all these reasons are valid, you should not lose sight of the time you have been paying your mortgage, one of the key pieces to know whether or not it is convenient for you to refinance your loan.
Why are time and interest rates key to refinancing?
Take into account that a mortgage refinance replaces your current loan with a new one, that is, the debt acquired is paid with a new term and under a new interest rate. It is clear that when you decide to refinance, you want it to be with the lowest interest rate, this does not become a financial problem unless you do not know the importance of time in the mortgage payment.
When you refinance your mortgage for a lower interest rate, regardless of how long you have been paying your mortgage, how long you will continue to pay (if you refinance for the same period, which is usually 30 years) and how long you plan to live in your property, then you could make a serious financial mistake and end up paying more for your house than if you had decided to keep your current loan. An example will help clarify this situation.
Assuming you have a $ 200,000 mortgage with 4.5% fixed rate interest, the 30-year payment would be about $ 1,013 each month, so you would end up paying a debt complete in that period for a total from $ 364,680.
If at 10 years of age, you decide to refinance your mortgage at a rate of 4%, thinking that this percentage is convenient for you because you would pay less monthly payments, which in practice is true, actually you would end up paying more for your house because you restart the term of your original loan for a new one.
In the same example, if in 10 years you had already paid $ 121,560 dollars (with a rate of 4.5%), when you resume your debt, although you would pay $ 954 monthly (with your new rate of 4%), in the end your house will have cost you $ 465,000 (the sum of the 10 years already paid plus the 30 years paying your new monthly payment), that is, more than double the value of the house and almost $ 100,000 more than it would have cost you if you had kept your mortgage.
You should also consider what to do this procedure entails an additional payment per request, opening fees, home inspection, and home value appraisal fees, among others.
In the same way it is important that in your decision you also visualize how long you are going to live in your houseBecause if you have been paying a mortgage for 10 years, you refinance another 30, and you move in 10 more years, in reality you would be paying 20 years of a mortgage that has lasted 40 years and from which you will surely not obtain any equity in the property.
It is important that you do this calculation with your current mortgage and that of your refinancing. Broadly speaking, if you want to refinance your mortgage, it is convenient that it is in the shortest life time of your current mortgageBecause less interest you have paid, you will have a better balance point to recover your finances and so that, in the long term, refinancing your mortgage has been a synonym of saving money of thousands of dollars.
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