“Should I consider refinancing my house?”
Listeners of Chris Brown’s True Stewardship ask refinancing questions often.
Some want to know if they should consolidate their consumer debt into a refinance. Others wonder if they should refinance so they can take advantage of lower interest rates. And some ask if they should refinance to lower their monthly mortgage payment.
While there isn’t a good one-size-fits-all answer, there are definitely some key points to think through if you’re considering a refinance in the near future.
1. Don’t refinance to lower your payment.
We frequently reference Proverbs 6:5 when we talk about cutting expenses to focus on paying off debt. But you shouldn’t refinance your home just to lower your monthly payment and throw more money at your consumer debt. As Chris says, “We never refinance for lower payments. We only refinance for lower interest.”
Here’s why: If you refinance your home and the monthly payment goes down, it probably means you’re extending the life of your loan—and you will end up paying more in interest. That’s not good.
Instead, your goal should be to refinance for a lower interest rate. If you can get a lower interest rate, you limit the amount of money you’re throwing at interest paid. And remember, interest paid is a penalty, but interest received is a reward. You don’t want to pay more interest.
2. Keep consumer debt and mortgage debt separate.
You don’t want to refinance in order to consolidate your debt. Debt consolidation is a con. It’s right there in the name: C-O-N. You don’t want any part of that. Instead of consolidating your debt, focus on eliminating it.
The problem is when you roll consumer debt into your mortgage, you feel like you’ve accomplished something. Suddenly you only have one debt to tackle instead of three or four! But now, instead of paying that $1,000 credit card off in a few months, you’ll be paying for it over the course of several years. And it’s going to end up costing you way more than $1,000.
Besides, like Chris has told listeners before, rolling consumer debt into your mortgage alleviates pressure that you need to feel. That healthy pressure keeps you motivated and will help you get out of debt faster than any kind of debt consolidation.
Related: 5 Ways to Stay Gazelle Intense
3. Do a break-even analysis first.
You can’t refinance your house for free; it costs some money upfront. The good news is, if it pays off in the long run, it might be a good idea to refinance. A break-even analysis is how you figure out whether or not it makes financial sense to refinance your home. Here’s how it works:
Say you can save $200 a month in interest over the life of your loan, but it costs $5,000 to refinance your mortgage. How many months will it take you to recoup the $5,000? If you do the math, you find out that it would take 25 months to “break even.” If you’re going to stay in the house for more than 25 months, maybe the refinance makes sense. But if you think you might be relocating or moving in that time frame—or if you can pay off the house in less than 25 months—it wouldn’t make sense to pay for a refinance.
It’s always a good idea to do a break-even analysis before you commit to refinancing.
And if you’re in a situation where refinancing isn’t an option, don’t worry. You have other options, too.
4. Downsize or move to a more affordable neighborhood.
We recommend keeping your housing costs (your monthly rent or mortgage payment) at or under 25% of your take-home pay on a 15-year fixed mortgage. If refinancing from a 30-year mortgage to a 15-year mortgage bumps you above that 25% mark, you may want to look into downsizing or moving a little further out of town where homes are more affordable.
5. Pay your 30-year mortgage like it’s a 15-year mortgage.
If you’re about halfway through your 30-year mortgage or on Baby Step 6, you can always take the DIY route. Figure out how much you need to pay each month to get rid of your house payment early—and then stick to that schedule. No need for an official refinance. This not only helps you pay the mortgage off ahead of time, but also saves you the refinancing fees. And the faster you pay it off, the less interest you pay in the long run.
There’s a lot to consider when it comes to refinancing your home. But at the end of the day, you’re working toward being completely debt-free. So if a refinance makes sense in your situation—run full speed ahead!