Ask a Charleston Financial Planner: Should You Be Refinancing?

Refinancing rates are constantly changing, but amidst the ongoing effects of the coronavirus pandemic, we have seen dramatic decreases in interest rates for mortgage refinancing. Even so, do lower rates necessarily mean it’s a good time for you to refinance?

Read on for a savvy guide from our team of Charleston CERTIFIED FINANCIAL PLANNER ™ professionals on what to consider for your financial health before deciding to refinance your home.

What You Need To Know About Refinancing According to Financial Advisors in Charleston, SC

The Basics of Refinancing

What does refinancing mean? Refinancing your mortgage means that you are, essentially, paying off your existing mortgage loan and replacing it with a new one, likely for one of several reasons. Home loans are a type of amortized loan that requires the lendee to make scheduled, periodic payments applied to both the loan principal and interest. In other words, when you take out a mortgage, you are first paying off the interest with any leftover amount going to the principal. As the interest decreases, the principal portion increases.

Keep in mind that when you choose to refinance, you are effectively restarting your loan. This means that it can take years to recoup your upfront investment in refinancing your home, so if you plan on selling your home in just a few years, it’s probably not worth it to take out a new loan for your mortgage.

As with your original mortgage, refinancing requires a title search, application fees, and an appraisal – in addition to a percentage of the loan’s principal. Since refinancing has its own costs and expenditures, it’s important to talk through your financial goals and situation with your CERTIFIED FINANCIAL PLANNER™ before taking on a new loan.

How Refinancing Impacts Your Home Equity

Refi rates can be affected by a number of economic factors like inflation or unemployment rates. A drop in rates could not only save you money on your monthly mortgage payment but also help you build equity in your home faster.

Home equity, the difference between how much your property is actually worth and how much you owe on your mortgage, is often tapped into to cover large expenses like remodeling your home or legacy planning for your child’s higher education. Remember that taking cash out of your home equity when refinancing won’t help further you on your journey to financial freedom!

Should You Refinance?

Financially savvy homeowners are constantly searching for the best ways to reduce their debt, increase the equity in their home, and save on – or even eliminate – their monthly mortgage expenses. That being said, you might want to obtain a lower interest rate on your payments, change the type of loan you have, shorten the term of your mortgage, have funds for a financial emergency or large expenditure, or simply to consolidate debt. Here are few general rules of thumb to follow when looking to refinance:

1.Lower Interest Rates

One of the best, and most common, reasons to refinance your mortgage is to get lower interest rates. If you can lower your rates by at least 1-2%, then refinancing is an option worth looking into because the reduced interest rate will compensate for closing costs that come with refinancing.

2. A Better Loan Term

30-year term mortgages are common because they are often more accessible and affordable month-to-month, as they allow you to make smaller payments over an extended period. This type of loan can leave you more room for other financial ventures and expenditures. With a longer-term loan, you will pay less in principal each month but more in interest, whereas with a short-term loan like a 10-year or 15-year mortgage, you will pay more in principal each month, but less interest over time. If rates are falling, it could be a great time to look at shortening your loan term. Depending on your financial situation and goals, a better loan for you could mean renegotiating for a longer or shorter-term mortgage plan.

3. Time to Grow

Refinancing can provide stability in your current living situation for the future. A general recommendation for refinancing is to plan on staying in the home long enough to recoup the costs of the financial change. It’s a ‘win-win’; you gain security while gaining more freedom as a result of refinancing.

4. Consolidate Debts

In the finance world, simpler is often better. If you have multiple high-interest debts, savings may be possible through consolidating debts into a refinanced mortgage loan. This can include auto loans, credit card debt, and second mortgages as well.

While there are many reasons that you should consider refinancing your home as a valuable tool for achieving greater financial freedom, it can also serve as a slippery slope into a cycle of debt. Remember, you will get the most value out of refinancing in the scenario that you both lower your interest rate and shorten the terms of your mortgage!

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Refinancing to Reach Financial Freedom

After hitting record lows in March, rates have since begun to slowly increase for 30-year fixed, 15-year fixed, and 10-year fixed refinances. Still, these rates remain significantly low by historical standards. If you are considering taking advantage of these rates by refinancing, our Charleston wealth advisors recommend taking these key questions into account:

  1. What are my short-term and long-term financial goals?
  2. How much longer will I live in the home?
  3. How much equity is in my home?
  4. Can I afford the closing costs?
  5. What is the difference in interest rates?
  6. How long until I break even?
  7. Are the potential savings, in the long run, worth the upfront cost?

Ready to start your journey to financial success? If you are weighing whether refinancing your home could be a solid next step but are feeling overwhelmed or confused, don’t worry! Our team of CERTIFIED FINANCIAL PLANNER™ professionals are here to help you.

As an independent, fiduciary, and fee-only financial planning firm in Mount Pleasant, SC, we tailor our wealth management plans to fit your specific needs. From achieving financial independence to protecting your legacy, our plans not only advise you on the best investments for you but also give you a holistic map for success. Contact us today to see if refinancing is the right decision for you!

The opinions expressed herein are those of Morris Financial Concepts, Inc. (“MFC”) and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future results. MFC relies on information from various sources believed to be reliable, including third parties, but cannot guarantee the accuracy and completeness of any third-party information. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.

The CFP® certification is granted by Certified Financial Planner Board of Standards, Inc. (CFP Board). To attain the certification, the candidate must complete the required educational, examination and experience requirements set forth by CFP Board. Certain designations, such as the CPA®, CFA® and others may satisfy the majority of the education component, and allow a candidate to sit for the CFP® Certification Examination upon completion of a Capstone Course. The 6-hour exam is administered in a computer-based-testing format. At least 3 years of qualifying full-time work experience are required for certification. Qualifying experience includes work in the area of the delivery of the personal financial planning process to clients, the direct support or supervision of others in the personal financial planning process, or teaching all, or any portion, of the personal financial planning process. In order to use the designation, CFP® professionals are required to complete 20 hours of CFP board certified