Refinancing Your Mortgage: What Costs to Consider
In this current low-rate environment, the decision to refinance to a lower rate and/or a lower term mortgage can be a relatively simple choice to make. Potentially saving tens of thousands of dollars in interest payments over the life of the mortgage is a huge benefit to homeowners. While any spreadsheet you may look at can show how much you will save over time, most individuals do not live according to a spreadsheet. Closing costs and fees aside, refinancing can have other hidden, personal costs to consider.
If, for example, one decided to refinance from a 30-year, $1,500/mo. mortgage to a 15-year, $2,000/mo. mortgage, you would obviously be saving a lot over the life of the loan with these increased payments. However, if one remains with the 30-year mortgage, the $500/mo. differential could be invested into the market, thus making it possible to build greater wealth over time via the market instead of just purely saving on interest payments.
Following the same example from the previous point, if this $500/mo. differential can really build more wealth over time, then refinancing may not be the right choice for you. However, one important question to ask is whether you will save the extra $500/mo. even if you don’t go through with the refinance and remain with your current mortgage.
It is straightforward to see how the numbers can work on paper but introducing the human element into this type of decision can make things complicated. However, if one is set on saving the $500/mo., thankfully we all now have access to automated savings options that can help make sure we are on track to meet savings goals.
Some individuals may just want to pay off debt as quickly as possible, and this is understandable. Getting rid of a huge liability in 15 years instead of 30 years is a major accomplishment. In instances like these, the emotional value of paying off debt outweighs the potential opportunity cost of investing the potential savings into your portfolio.
Ultimately, the decision to refinance is about striking a balance between the future and now. While the numbers will more than likely tell you what path to take, there are psychological elements that may inform your decision. Consulting with a financial advisor can help you make an informed decision.
Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.