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To Refi or Not to Refi? That’s the Question.

Joseph Dallo of Farmington Hills’ Dallo Financial and Financial Focus discusses home refinancing.

Joseph Dallo of Dallo Financial in Farmington Hills said that in recent years, Americans seeking to take advantage of low interest rates have lined up to refinance their mortgages, often resulting in significantly lower monthly payments. However, while it’s true that refinancing can help you reduce the costs associated with borrowing money to own a home, Dallo said it is not a strategy that makes sense for all individuals in all situations.

“Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you,” Dallo said.

In the past, the rule of thumb when it came to refinancing was that it only makes sense if one can lower his or her interest rate by at least two percentage points. But Dallo said that what really matters is how long it will take someone to break even and whether he or she plans to stay in his or her home that long. 

“Make sure you understand, and are comfortable with, the amount of time it will take for your overall savings to compensate for the cost of the refinancing,” Dallo explained.

Dallo provided this example to consider: if you had a 30-year $200,000 mortgage with a 6.5% interest rate, your monthly payment would be $1,264. If you refinanced at 4.5%, your new monthly payment would be $1,013, a savings of $251 per month. Assuming that your new closing costs amounted to $2,000, it would take eight months to break even ($251 x 8 = $2,008). If you planned to stay in your home for at least eight more months, then a refi would be appropriate under these conditions. But, if you planned to sell the house before then, you might not want to bother refinancing. 

Since not all mortgages are created equal, Dallo said to not make the mistake of choosing a mortgage based only on its stated annual percentage rate (APR) because there are a variety of other important variables to consider, such as the term of the mortgage, or the amount of time it will take you to pay off the loan’s principal and interest, and the variability of the interest rate, which is referring to the two basic types of mortgages: “fixed” (unchanging) or “variable” (changing after a predetermined amount of time has passed, such as one year or five years).

“Although short-term mortgages typically offer lower interest rates than long-term mortgages, they usually involve higher monthly payments,” Dallo said. “On the other hand, they can result in significantly reduced interest costs over time.”

Another thing Dallo said to keep in mind is that while an adjustable-rate mortgage (ARM) usually offers a lower introductory rate than fixed-rate mortgage with a comparable term, the ARM’s rate could jump in the future if interest rates rise.

“If you plan to stay in your home for a long time, it may make sense to opt for the predictability and security of a fixed rate whereas an ARM might make sense if you plan to sell before its rate is allowed to go up,” Dallo explained. “Also, keep in mind that interest rates have hovered near historical lows in recent years and are more likely to increase than decrease over time.” 

Dallo also advised not to forget about points, also known as the fees you pay to a lender or broker when you close the deal.

“While a ‘no cost’ or ‘zero point’ mortgage does not carry this up-front cost, it could provide to be more expensive if the lender charges a higher interest rate instead,” he said. “So, you’ll need to determine whether the savings from a lower rate justify the added costs of paying points. One point is equal to one percent of the loan’s value.”

Lastly, Dallo discussed that one’s current lender may actually make it easier and cheaper to refinance than another lender would since one’s current lender is likely to have all the important financial information on hand already, which reduces the time and resources necessary to process the application.

“But don’t let that be your only consideration,” he added. “To make a well-informed, confident decision, you’ll need to shop around, crunch the numbers and ask plenty of questions.”

Dallo Financial is committed to helping people, providing holistic, comprehensive and proactive financial planning that is personalized for one’s purpose. They’re located at 31731 Northwestern Highway in Suite 261W in Farmington Hills. For more information about Dallo Financial’s services or to set up a meeting, call (248)-914-8146 or visit dallofinancial.com.

Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. LPL Financial Representatives do not provide Mortgage or Loan Services. This material was prepared for Joseph Dallo’s use.

“Before you make a commitment to refinance your mortgage, it’s important to do your homework, you’ll need to shop around, crunch the numbers and ask plenty of questions.”