When’s It Time to Refinance?

| July 28, 2023

In early July the government reported that overall inflation in June was 3% on an annual basis. That continued a sustained drop in inflation, which was pretty good news—even in the wonky housing market. There’s still a long way to go before demand, supply, mortgage rates, and housing costs are in balance. But it seems like a start.

Newer homeowners who are suffering from the highest mortgage rates in 20 years can’t wait for rates to go down. Recent 30-year fixed mortgages were just under 7% — that’s more than twice the rate at the beginning of 2022. One of the best tools in their financial toolbelt is to refinance when the time is right.

So when’s the right time? One of the main reasons to refinance is to get a lower interest rate. You might be able to reduce your mortgage payment and save on interest costs over the life of the loan. People differ on how much lower interest rates need to go before it’s worth your while to refinance.

A common rule of thumb is at least a 1% reduction in your interest rate. There are a lot of factors that come into play before making this decision, however, such as whether you’ll stay in your home long enough to recoup the various fees involved with refinancing.

Another factor is whether you’ve improved your credit score. The better your score, the better access you’ll have to lower rates and better loan terms. So besides monitoring interest rates, keep track of your credit score.

A third factor is whether you’re trying to access your home equity. Refinancing offers the opportunity to tap into home equity for home improvements, paying off debt or medical bills, or covering major expenses.

Were you required to pay for private mortgage insurance (PMI) when you bought the home? If your down payment was less than 20%, you might have needed PMI. But maybe your home value has increased enough that, when combined with a decreasing mortgage balance, your home equity now surpasses the 20% level. In that case it might be worthwhile to refinance and reduce your mortgage payment significantly.

Refinancing to shorten your loan terms is often a great option, if you can afford it. You’ll likely have higher monthly payments, but you can save a lot in interest payments. And wouldn’t it feel great to be free and clear of a mortgage after only 15 years.

Refinancing can be a great way to dramatically improve your financial situation. But it isn’t always an easy one. We help people understand the pros and cons of refinancing based on their situation, and I suggest finding consulting with a financial professional. 

It's uncertain when mortgage rates will see a meaningful decline. But Fannie Mae and other organizations are expecting rates to decline this year and into the first few months of next year. If your home is your biggest asset, a sustained drop in mortgage rates might be some of the best financial news you’ve had for a couple of years.

Sources:

https://www.politico.com/news/2023/07/12/housin-inflation-fed-00105757

https://www.nerdwallet.com/article/mortgages/pmi-calculator

https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/

https://www.cbsnews.com/news/why-you-should-refinance-your-mortgage-in-2023/

https://www.cbsnews.com/news/when-will-mortgage-interest-rates-drop-what-experts-think/

https://better.com/content/how-much-does-it-cost-to-refinance/?gad=1&gclid=CjwKCAjwwb6lBhBJEiwAbuVUSpnzQjqB84QkI9L26N3qs81AqNQDMp-pavj32b_if4ZkJf7H-urCaRoCdxgQAvD_BwE&gclsrc=aw.ds



Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com.   Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC.  Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through  an Avantax affiliated insurance agency.  6260 Lake Osprey Dr. Lakewood Ranch, FL 34240.  The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries.  Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index.  An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.  CDs are FDIC insured and offer a fixed rate of return.  They do not necessarily protect against a rising cost of living.  The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value.  Other investments are not insured and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested.