Should You Refinance in 2021?

It seems like everyone is jumping into refinancing right now.

With interest rates at an all time low, many consumers are taking the opportunity to refinance their houses. But before you start gathering the documents required to start the process, let’s consider if refinancing is really the right thing for your situation.

When To Refinance

Refinancing in 2021 could be beneficial as you can access a lower interest rate, which in turn may reduce your overall payment amount (and monthly cost). 

In some cases, drastically reducing your interest rate can help you pay off the total cost faster than originally planned. If you are only reducing your interest rate by half a percent, it is important to determine if refinancing is appropriate.

When NOT To Refinance

When considering refinancing, the first thing to note is the mortgage term and whether starting over with a completely new 30-year term is suitable. If you have already paid off 10 years, for example, while your monthly premiums may be lower, they will be longer. 

A good compromise may be a 15-year mortgage instead. While you can still access the lower interest rates, this length may be more appropriate depending on your income and how soon you can expect to retire. It is also worth determining if paying more monthly on your existing loan makes sense. With all of these options looking at your income, retirement expectations, and overall expenses can help determine if refinancing is right for you.

Another thing to note is that refinancing is not free. An appraisal can leave you $500 out of pocket and closing costs are generally 2-6% of the amount you are refinancing. While closing costs are typically rolled into the loan it is worthwhile to calculate your breakeven point to determine whether refinancing is cost-efficient.

What is the Breakeven Point?

Calculating the breakeven point is useful to determine when the savings outweigh the costs. It lets you know how long you will technically be “out of pocket”’ before your repayments hit the “savings” threshold. Let’s take a look at an example. 

Imagine it costs you $4000 to refinance (including all fees, appraisals and other costs). Now, imagine that the refinance saves you $200 per month. Divide your total expenses by the amount you are saving. In this example, it would take 20 months to break even. After 20 months, you are saving money. 

Cash-Out Refinance

Many lenders often encourage those refinancing to do a cash-out refinance. This is often available if you have equity in your home and your new overall loan is less than 80% of your home’s value. There are pros and cons to this. Yes, you may get a lump-sum of cash to do what you want with it, but do not forget if you go to sell your home later this equity will most likely not be seen again. It will also increase your monthly note. If these funds are put to good use and saved it may be worthwhile. Additionally, if you feel that home value will decrease or if we see another housing crisis you have already taken advantage of getting some equity out. Just note that if you need to sell your home, you don’t want to be underwater and owe more than you can get because you took out cash. Cashing out is not for all homeowners so make sure you know the various scenarios. 

So, is refinancing right for you? Let’s jump on a call to discuss your individual circumstances and whether refinancing fits within your financial plan.