With the recent 50 basis points rate cut by the Federal Reserve, some homeowners may be wondering if it’s time to refinance. While lower rates can mean savings, refinancing isn’t always the best move. Furthermore, it’s strongly anticipated that the Fed will continue to cut rates. Regardless, let’s explore the pros and cons.
Pros of Refinancing Your Mortgage
- Lower Monthly Payments: The recent rate cut can reduce your monthly payments. For example, lowering your rate from 5% to 4.5% on a $300,000 mortgage could save you around $90 per month, or over $30,000 in interest over 30 years.
- Shorten Your Loan Term: Switching from a 30-year loan to a 15-year loan can help you pay off your mortgage faster. Even if payments increase slightly, you could save a significant amount on interest in the long run.
- Switch to a Fixed-Rate: If you have an adjustable-rate mortgage (ARM), refinancing to a fixed rate locks in a stable rate and protects you from future rate increases.
- Access Home Equity: A cash-out refinance allows you to borrow against your home’s equity. For example, if you’ve built $100,000 in equity, you could refinance and use $50,000 for home improvements or debt consolidation.
Cons of Refinancing Your Mortgage
- Closing Costs: Refinancing involves fees like appraisal and origination fees, often totaling 2% to 5% of the loan amount. If you save $200 per month but face $4,000 in closing costs, it could take 20 months to break even.
- Resetting Your Loan Term: If you’ve already paid several years on a 30-year loan, refinancing resets the clock, and you may end up paying more interest in the long run.
- Risk of Losing Equity: Cashing out too much equity reduces your ownership stake in the home. If the housing market dips, this could leave you vulnerable, with less value in your home.
- Qualification Requirements: You’ll still need good credit and sufficient income to qualify for the best rates, which might be a challenge if your financial situation has changed since your original mortgage.
The Fed’s recent rate cut could signal to recent home buyers that refinancing may be a future financial decision to consider, but it’s important to weigh the long-term benefits against the costs. If you plan to stay in your home for a while, refinancing could save you money. Unsure if it’s right for you? Reach out to your Francis financial planner for guidance.
If you have any questions, please contact your Francis financial planner or reach out to us via phone at 866.232.6457 or email at info@francisway.com.
