Does a mortgage refinance make sense after you have made many years of payments, such as 10 or 15? The answer will mostly depend on your financial goals for the new loan and how long you want to stay in that house.
There are several major benefits to refinancing:
- You can reduce your monthly payment by getting a lower mortgage rate
- You can get another type of loan product
- You can put two mortgage into one
- You can pay down your loan faster
Whether it makes sense to refinance after 10 years will come down to answering these questions:
#1 Will a Refinance Save Me Money?
You need to calculate all costs and possible savings before you decide if a refinance will save you. Savings from a refinance go beyond just the break even point where you start to save money after closing costs are considered. If you want to sell your house in three years, you may not have enough time to break even.
You may refinance without out of pocket costs, but there is no break even point as the refinance did not cost you money out of pocket. That said, there is a lesser cut in your monthly payment because your no cost refinance has a higher interest rate and possible bigger loan balance. (HSH.com)
#2 What Is the Breakeven Point?
The breakeven period represents the duration required to recoup the closing costs associated with a new mortgage, allowing you to begin enjoying the savings from a reduced interest rate and lower monthly payments. According to Andrews, the breakeven period being two years or less is typically the threshold for refinancing to be financially beneficial for most individuals.
Understanding the breakeven period is essential in determining the feasibility of refinancing. If you have a remaining mortgage term of 10 years and are contemplating refinancing, our recommendation is to opt for a 10-year mortgage with 120 months. This approach aligns with the breakeven principle, ensuring that the costs incurred during refinancing are recovered within a reasonable timeframe.
It’s crucial to consider whether refinancing will result in long-term cost savings. If the breakeven period indicates that you will ultimately spend more over time, opting for refinancing only makes sense if you prioritize the flexibility that lower monthly payments provide. Without a clear need for improved budget flexibility, committing to additional decades of mortgage payments may not be advantageous.
#3 Will the Lower Rate Save Me Money?
A loan officer can fool you into thinking that you will save money with the lower rate alone. But this figure is not always right in terms of real savings. If your loan is just a few years old, and you can refinance to a lower rate, such as one point lower, making your term longer only has minimal effects. But if you are 10 years into your mortgage and trade a lower rate for a longer term, you may not be saving much money. You might even cost yourself more. See 15 year vs 30 year mortgage differences.
#4 Do I need to refinance with my current lender?
No. In fact, you are smart to get quotes on a refinance from other lenders before speaking to your current lender. Some lenders do have retention programs they use to prevent homeowners from leaving the fold and going with another lender. But the deals offered may not be as good as what you find by shopping around. Also, your lender could have less of an incentive to close your deal fast because it already has you as a client with a higher rate.
#5 Will Your Home Value Affect the Refinance?
If the value of your home is lower, even if you are underwater, there are some refinance options available. But you have to know how much equity is in the property. Your agent can give you an idea of your home’s current value. Once you have that data, you can divide the loan balance by the home’s value to get your loan to value or LTV. So, if you have a home with a value of $200,000 and the balance is $150,000, the LTV is 75%.
#6 Will My Credit Score Affect My Refinance?
Tighter loan standards today make it harder to refinance when you have a lower credit score. To get the best refinance rates, you will find you need to have a FICO of 740 or higher. It is possible to get a Fannie Mae or Freddie Mac backed refinance loan with a low credit score of 620, but there will be higher fees and rate that reduce the benefit of refinancing. Read more about what credit score you need for a mortgage refinance today.
#7 Should I Get a No-Cost Refinance?
There is no such thing, in reality. The costs will always be rolled into the balance and are paid by you. Or they are taken by the lender and they charge you a higher rate. A no closing cost refinance mortgage is not always bad, but if you want to make your refinance on your mortgage that you have paid 10 years on to really pay, it makes sense to pay the closing costs yourself.
Takeaway On Refinancing a Mortgage that Is Close to Being Paid Off
The question arises: is it worthwhile to refinance a nearly paid-off home mortgage? Prior to initiating the refinancing process, it’s crucial to establish your goals for obtaining a new loan. While the appeal of securing a lower monthly payment or converting equity into cash may be enticing, it doesn’t automatically imply that refinancing is a sensible decision. The key consideration lies in evaluating the expenses associated with securing a new loan and determining whether the potential savings over time will surpass the initial costs incurred.
The bottom line on refinancing after 10 years comes down to the rate that you get, how closing costs are paid, how much closing costs are, and crucially, how long you plan to stay in the home. If you are going to stay there another 10 years, then you can make strong argument to refinance. If you are leaving in two years, you probably are not going to recoup your costs.
- Does a Mortgage Refinance Make Sense? (n.d.). Retrieved from https://www.hsh.com/finance/refinance/does-mortgage-refinance-make-sense.html