When we have a mortgage interest rate dip it apparently makes for good news. Good Morning America had a segment on NOW being a great time to refinance because of how great the rates are and my wife asked me (for about the 100th time), “Why don’t we refinance?” After I explained the reasons why it doesn’t make sense for us I got the inspiration to tell everyone when the best time to refinance really is.
Here’s the answer. The market has no bearing on if it’s a great time to refinance.It is all relevant to your overall goals and financial strategy. Refinancing has so much more to do than with interest rates. Getting a lower interest rate could be what some people’s goal is but it is just one of the motivations.
You can look at refinancing for…
a lower rate,
for a fixed rate,
for a shorter term or a longer term,
for equity harvest for a number of reasons
for debt consolidation,
among other strategies.
The point is that each person has their own unique factors in their life that may have a different motivation and getting a lower rate isn’t necessarily the best idea.
Here’s an example.I had a client come to me that had gotten in over their head with some poor credit card decisions that affected their credit score. They had a 5% rate on their mortgage (which was low to the market at that time) and equity in their home. Their concern was that they didn’t want to give up their rate but at the same time were worried that their cash flow issues would wind them up in foreclosure. We came up with a two part plan to help them save their home and lower their stress.
First, we refinanced the house and used their equity (which was an unused asset) and consolidated their payments. Their new mortgage had an 8% interest rate because of their credit score but overall their payments were lower than what they had been putting out in total payments prior to the refinance. This also took their debt, in their circumstance their bad debt, and made it tax advantaged debt. The second part of the plan was credit repair so their goal over the next 12 months was to make sure that they recovered from their bad decisions.
Once we got to the point where their credit had been repaired about 14 months later, we refinanced them back into a 5% rate and lowered their payment again. This plan didn’t negate the debt they had accumulated but had positioned it so that they were able to apply more to principal to lower that debt more quickly and also to save their home.
When is it a good time to refinance? There is only one way to know. Get an evaluation. With minimal information I can look at your current loan and evaluate your situation to let you know what things are open to you. Right now is a GREAT time to take advantage of that. Rates are low but also very volatile and could move higher at any time and capturing that lower rate may be the key to opening up some options for you. The last quarter of 2014 saw a huge amount of new purchases that brought values up in many areas so if you need a little more equity to have a refinance make sense for you it might be there now.