How to evaluate a potential refinance before rates go…

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Google says that the most searched topic in the US is student loans followed closely by mortgage calculator.  And, interestingly, Pennsylvania and Maine residents search on mortgage calculator the most with over 2.3M views annually.  There are clearly a lot of people in the Keystone state thinking about buying real estate and/or refinancing their existing mortgages.  With rates still under 3% it is still a great opportunity to lock in a very low rate – IF it makes sense to do so.

For those who are considering refinancing their existing mortgage loan, we thought this presented a good opportunity to point out a trap that we see many people fall into when evaluating mortgages.  That trap is simply comparing ones existing payment with the new likely lower rate payment.  We see it all the time.  But, digging a little deeper can reveal the truth to whether it makes sense or not.  Instead, we would like to present an approach for how to evaluate whether that rate deal is really a deal.  First, there is no point to looking backward.  What has happened in the past has happened.  For most, this might be the second or third time they have refinanced in the past ten years or so as rates have plummeted first after the financial crisis when nobody wanted to buy real estate.  And, now again since Covid.  Who would have ever dreamed that a 4.75% 30 year rate in 2018 would have dropped 60% by 2021 to 2.75% as an example.  A very good lesson in how it is impossible to predict interest rates.  Afterall, rates were supposed to rise starting eight years ago or so…never happened.

So, looking forward, simply total up the sum of your remaining payments under your current loan and compare that number to the total outlay of a new mortgage of varying terms.  Now you can determine whether there is any advantage to refinancing.  If the new payment is higher, but, total outlay is less, go back and add the difference in payment to the existing mortgage and see how many years/months that eliminates.  Because if you are moving to a 15 year mortgage, you could be better off keeping what you have and paying a little more rather than incur the hastle and costs of refinancing.

Also, be sure to shop around and work with the best in the business.  The true mortgage loan professionals can add a lot of value to the process than just a slightly better rate.  Another things to remember is that 90% of taxpayers now file using the increased standard deduction rather than itemize so the tax benefits of holding a mortgage may be inconsequential.  Thirty years ago the tax benefits were  more significant so be sure not to assume outdated rules of thumb.

And, in closing, just a word of caution to new buyers: real estate cycles in and out of favor just like the financial markets.  So, don’t assume that values are going to continue to go up especially if you are buying near a top of the market.  But, it’s anyone’s guess if that is true.  Just be careful out there in the land of bidding wars.

If you need help evaluating your real estate and loan options, please let us know as we have relationships with those considered among the best in the business and can refer AFTER we figure out the numbers!

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