As interest rates drop, home owners and investors alike pay attention. As a home owner, you know your monthly mortgage payment, you know your interest rate, and you remember, all too well, the closing costs and miscellaneous expenses involved with securing your mortgage. Yet, when surrounded by market conditions that lead to declining interest rates, we must all weigh the benefits with the costs and how those decreasing interest rates affect us.
The sluggish economic conditions that may surround declining interest rates are of concern, in that job security or portfolio investment returns may be less certain. Yet, when refinancing mortgages, if the upfront costs of mortgage refinance do not out way the midterm benefits of money saved each month due to lower mortgage payments, then by all means read further and explore if a mortgage refinance will increase your cash flow by reducing your mortgage payments and freeing up more disposable income.
We advise against the standard recommendation that any drop of 2 or more points in the interest rate warrants refinancing a mortgage. Though this has been a long standing consideration, recent changes in options and the borrower mean it is no longer appropriate. Those with debt who have comfortable incomes hold a wider variety of investments and are more pro-active in effectively dealing in multiple monetary tools to maximize their returns. These investors can also relate long and short term needs to different products. The area where these borrowers have not maximized their performance is in the use of ever increasingly expensive credit card usage over recent decades.
Critical factors to consider when refinancing a home loan:
1. Current interest rate being offered.
2. Interest rate of your current mortgage.
3. The number of years remaining on your current mortgage.
4. Does your current mortgage have an early pay off penalty?
5. The number of years you plan on keeping your new mortgage.
6. Research banks competing to lower closing costs.
Once you've thought through these basic concepts and jotted down a few notes for yourself about refinancing your home mortgage, you will have a relatively clear notion of how this will affect your cash flow and if it will generate additional cash flow from the monthly savings. At this point, an online financial or mortgage calculator might be helpful to run a few financial scenarios and speak with loan officer about refinancing.
NB: Unusually severe currency value fluctuations can have a positive or negative effect on the outcome of your calculations. If this is known to be occurring or expected to occur, you should allow for this factor when calculating profit or loss from your mortgage refinance.
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