Q: With interest rates so low, we’ve been thinking about refinancing our mortgage (5%). But it seems like that won’t happen since we have just about 18% equity in our house. Besides, we need an appraisal that might not help our cause. We have a little extra money to put towards the mortgage, but when does it make sense to do it? I don’t believe any of our other investments is making more than 5%.
– Jim M.
A: With the rapid rise in mortgage rates recently, refinancing might actually not be worth the trouble.
As for the right the time to make extra payments or larger payments on your mortgage, that would depend on the your other financial obligations, risk tolerance and how long you plan to keep your home.
Since you say that you have extra funds to expedite mortgage repayment, I’m going to assume that you’re already maintaining an emergency fund, maxing your retirement vehicles and carrying little to no debt with rates of more than 5%. If that’s not the case, be sure to attend to these financial goals first.
Then, you must consider the other opportunities you’re forfeiting for more equity in your home. The significant gains by stocks in 2013 is worth noting, though it will be up to you to decide if you can stomach the ups-and-downs of the stock market. However, it’s hard to say no to a guaranteed 5% return.
Finally, do you plan to keep the house for long? Some people prefer to hold onto their liquid cash because they don’t want to tie it up in a home that they expect to sell soon.
If mortgage rates take a dip again, making extra payments now will help you achieve the 80% loan-to-value (LTV) ratio that’s typically required to qualify for refinancing.
When you do decide to increase your mortgage repayment, ask your lender about any policies regarding payments that are made outside of the standard repayment schedule. Make sure that there are no fees for extra payments and that these payments go toward paying down principal.
You may also be interested a lender’s bi-monthly payment program. Instead of making a monthly payment (12 times per year), you’ll make a payment every two weeks (equivalent of 13 monthly payments per year). There may be a fee for this program.