I always start out each of my refinance (what’s a refinance?) client meetings with the same blank check question: “How can I help you meet your needs and goals for the transaction today?” I’m thinking of setting up a camera to catch my client’s priceless reactions when my first question has been asked. Eyes glaze over, their breathe is shortened as they stumble out the phrase “I just want to lower my interest rate.” And with that, everything has gone south.
We’re thirty seconds in and I’m convinced only one of us has thought this through. I’ll give you hint, it’s the one that has helped navigate doe eyed, well intentioned clients through the refinance process for over 15 years. Now, I can’t argue having the lowest interest rate makes you the top dog at the community BBQ, but I will tell you this: Refinancing a home mortgage to a lower interest rate isn’t always the only decision you need to consider. Believe it or not, refinancing requires you to have a goal in mind. Consider these three things when deciding your goal for the transaction:
Reducing the interest rate. It’s a plain fact that the lower the interest rate, the less total interest that you will pay back to the bank. Reducing your interest rate as little as .500% based on higher current balances can save you thousands of dollars in interest over the life of the loan. There is no magic number for a fail save reason to refinance based on interest rate reduction, although most loan officers will try to tell you there is one. It just has to make sense, based on the costs of doing the refinance.
Consolidating your debt. Refinancing your current home mortgage is a great tool to allow you to pay off an existing second mortgage or outstanding home equity line of credit balance by consolidating them. Under certain circumstances, even some consumer accounts such as credit cards or auto bills can be included to form one consolidated payment.
Switching terms. If you got in on an adjustable rate mortgage for your home, refinancing to convert to a fixed rate mortgage is often an ideal situation, especially in low interest-rate environments like now. You might also consider switching from a 30 to a 15 year mortgage (or even a 10 yr note period) to help accelerate the repayment of your mortgage and save drastically on total interest paid. Some prefer to also maximize a reduction in total payment by restarting the amortization at 30 yrs (although I highly urge you against doing this based on the amount of extra interest you’ll pay in the long run).
Deciding your goal for a refinance isn’t always as easy as how much can you get the interest rate down. No matter what your goal for refinancing turns out to be, make sure that it fits into your plan. Talk your new mortgage plans over with your local community loan officer to make sure that the program that you’re getting is an ideal fit for your needs and goals for completing the transaction. You’ll be glad you did.