When to Properly Handle Refinancing Your Mortgage Rate

If you’re like most Americans, the equity in your home is your single largest asset. As such, it also should be a key component in your financial portfolio. While some treat ownership of the family home as an investment opportunity and regularly upgrade to newer and larger houses hoping the real estate cycle continues working in their favor, many consider home ownership more of a long-term commitment creating stability for the family. But if part of the home ownership equation involves carrying a mortgage on the property, it only makes sense to look for opportunities to save some money in the process. Spinnaker Investment Group can assist you in determining if a mortgage refi is in your best interests.

Refinancing to achieve a lower monthly payment

Achieving a lower payment can be accomplished in a couple of ways. The most obvious, of course, is by getting a new loan with a lower interest rate than your existing one. Or, if your current loan requires private mortgage insurance, refinancing to a loan that doesn’t will create an instant savings. The primary consideration is to weigh the closing costs of the loan against the monthly savings with your future goals in mind. For instance, if a refi costs $5000 and the monthly savings will be $150, you will recoup the costs after 34 months. But if you plan to move within the next two years, a refinance may not make sense.

Refinancing to achieve a shorter term

While a shorter term loan may seem attractive due to a lower mortgage rate and quicker time to having no mortgage payment at all, there are several issues to consider. First, you’re likely to be paying a higher monthly payment. Second, mortgage loans are typically set up with interest front-loaded; that is, a higher percentage of your payment goes to interest in the early years of the term than the later years. For example, in year 18 of a 30 year loan, you might actually be paying less interest on a monthly basis than in the first year or two of a 10 year loan, despite the interest rate disparity. Depending on the circumstances, it may be worth considering keeping your present loan and make additional, principle-only payments each month.

Refinancing to tap the equity

This can be a slippery slope and should be approached with caution. Unexpected expenses, college tuition or consolidating other debt are all reasons why many homeowners look to their home’s equity. One justification is that home mortgage interest is tax deductible. While that’s true, the real question to ask is whether it is prudent to increase the number of years of paying a mortgage at a higher payment.

As a homeowner, if you can increase your equity, reduce your debt, save money or pay off your loan quicker, you are way ahead of the game. Let Spinnaker Investment Group help you achieve your investment goals. Contact us today.

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