Should You Refinance Your Mortgage?

We all know at least one movie or tv show where parents offer/are forced to refinance their home for their son/daughter's dream/college/medical bills and, somehow, it solves every single problem. We're left to ask ourselves if it's as unrealistic as basically everything else we see in cinema. 

If you're thinking about refinancing your mortgage, know that while there are great reasons to do so, there are almost as many equally bad reasons to do so. That said, it often always depends on your unique situation, spending habits and goals. 

2 DECENT REASONS TO REFINANCE YOUR MORTGAGE

We say “decent” because again, it really depends on your specific situation. 

The first reason to refinance your mortgage is to grow your long-term savings (like retirement) and the second reason is to pay down high interest credit card debt (this is a tricky one).

Now, we're not saying these are 100% perfect reasons in-of-themselves that are not prone to error. But, of all the reasons to refinance, and largely depending on your situation, these are two of the better ones.

Reason 1 - You could possibly grow your savings: You can potentially improve your long term savings goals through refinancing by either lowering the interest rate on your mortgage or by getting a smaller monthly payment. Both of these options, ideally, will give you more cash flow per month to put towards savings, like a great compounding interest account (link here to other post once approved) or for your retirement. 

Alternatively (for the first option) the lower your rate is, the faster you could potentially pay it off (as you’ll be paying less interest over the life of the mortgage).
The reason having long term savings is just as important as (hopefully) owning your home fully one day is because you want to have steady cash flow, regardless of the season of life you’re in. 

When it comes to saving for retirement, you can never get back the years of your youth and the benefit of saving early and in the right ways. Not having a mortgage payment is definitely attractive, but you will not be able to benefit from savings and investment growth as well in your later years. 

Yes, there are no guarantees when it comes to returns on investment, and a smaller monthly payment does mean a bit more risk. 

Reason 2 - You could possibly pay down high interest credit card debt: This one comes with a huge disclaimer because it could also be one of the worst reasons to do it. Yes, confusing, but it really depends on your situation, what your goals are and what your realistic spending habits are like. 

Consider these two situations. 

“Mary” refinances her home to pay off $10,000 in credit card debt. She has a good credit score and wants to keep it that way. She does so, pays it off and then uses what was her monthly payment to her credit card and puts it into her compounding savings account every month instead.

“Frank” also refinances his home to pay off $10,000 in credit card debt. His credit score is also good. He pays it down, but then continues to spend the same way he did before, going back to using his credit card and not paying the full balance down every month. He doesn’t come out ahead as he’s racked up a new balance and hasn’t changed his savings habit to match.

The timeline of refinancing also matters a lot if you’re going to use it to pay off debt. If you’re going to repay debt at a lower rate for, say, 30 years, you probably won’t come out better at the end then if you didn’t refinance. 

Also, if your credit score is low, you probably won’t get the best rate as it is, and it won’t make the refinancing worth it. That said, always explore all of your options and having a great financial advisor to walk you through all the nuanced choices is a great idea. 

Call us today if you have questions.