MORTGAGE REFINANCE

Generally speaking, the cost of debt, in percentage rate terms, is the interest rate of the debt. Therefore a lower rate is almost always preferred. There is some good news this week- rates have been dropping.

Oftentimes if someone has debt, their largest debt is their mortgage. If current mortgage rates are lower than the fixed rate you have on your mortgage, it may be financially beneficial to look at refinancing.

As of the time of my writing this, rates were still quite a bit higher than where they were a few years back, but home buyers that did not secure one of those historically low rates a few years back should start paying attention. Mortgage rates have dropped this week and it is possible that even now the rates the market is offering are lower than your current.

There are several items to consider when refinancing. Below are a few of them:

1. It is highly unlikely it would ever make sense to refinance to a higher rate.

2. When you refinance typically your monthly payment goes down. If you make the lower monthly payment, it is possible you will pay more interest over the life of the loan even if your rate is lower. In order to not do this, you could consider continuing to make the same higher monthly payment and applying the difference to principal. By doing this you will typically pay off the mortgage even quicker than if you had maintained your old mortgage. Whether or not this makes sense, depends on the facts and circumstances.

3. There are fees to refinancing. If you are hesitant to refinance now due to fees, you could consider still refinancing but taking a slightly higher rate than the minimum (still lower than current) so that any lender credits offset the fees. This allows you to lock in where rates are currently but still refinance again in several months if rates continue to fall.

4. Be aware of what your current loan balance is and what the loan balance will start at with the new mortgage. Sometimes fees are rolled into the new mortgage. In other words, even if you don't have to give cash at closing you may still be paying high fees.

Mortgages are complicated and lenders don't always do the best job of presenting the options well. They are trying to sell you a mortgage. Your goal is to have a mortgage that is very reasonable for your income level (many recommend housing costs are not more than 25% of income as a base guideline) and decrease the negative impact a mortgage has on your overall net assets.

Please review with a financial professional if a mortgage refinance could make sense in your specific situation prior to refinancing.