There are all sorts of “recommendations” on lowering their interest rate that homeowners will receive along their journey. Most of these will focus exclusively on how a lower rate must be better because it’s, well, lower. Others will promote shorter terms or suggest that some particular threshold of change should be your trigger (if you can lower your rate by 1% or 2%, for example).
I believe that all of these recommendations are either misinformed or offered solely for the benefit of someone who wants your money.
The correct way to look at refinancing your mortgage when rates are lower than what you presently have is to look at your mortgage in terms of “Lifetime Interest Cost.” The core ideas behind this approach are:
- We want to pay-off our mortgage at some point – preferably in a timeframe no longer than 30-years
- The combined total of ALL the interest we pay (plus the closing costs for each mortgage we take out) is the true metric of the cost of the money
From these two ideas comes a framework for determining whether you, the homeowner, will benefit from refinancing:
If the total length of time for your mortgage isn’t increasing AND if the combined total of all interest and closing costs is less than the what you have presently, it’s worth investigating further.
But… there’s more to it than that.
That’s because less than ½% of all mortgages are kept open for the full term. About 80% of mortgages pay-off in 4 – 7 years (that range is probably going to trend a little longer once we move into a period of higher rates) so that suggests that we need to make sure that you receive a benefit within that (shorter) timeframe. So, while it’s true that taking out a mortgage is fun, it really isn’t that much fun so you have to make sure you a making a profit, too.
Your particular circumstances will have a lot to do with the thinking process. You need to ask yourself questions such as:
- Where am I age and stage wise? Just beginning in life or about to retire?
- Is there a major life-event on the horizon? Do I have an upcoming marriage, family, career, or other event that might impact my housing needs?
- How will refinancing impact my wealth-building plan and what does my financial advisor think?
- Is the mortgage I’m paying off an adjustable rate mortgage (ARM) that may increase my Lifetime Interest Cost?
My hope is that the insights provided by this article helps you see the benefit of speaking with a mortgage professional – one who is more interested in your financial well-being than his or hers. Please contact me for a free mortgage review to learn whether your Lifetime Interest Cost may be lowered.