Should you refinance your mortgage if you plan on moving?

We’re all familiar with the token financial advice that dominates the news cycle every January: contribute 10% of your salary each year to retirement, save an emergency fund, eliminate high-interest debt first, and don’t refinance your mortgage if you want to move in the near future.

But what if it is time to shake up that advice? Due to the COVID-19 pandemic and its effect on interest rates, current mortgage rates may still be low enough for it to make sense to refinance – even if moving is in the near term future.

Should you refinance if you plan on moving?

Just because you're moving doesn't mean refinancing is off the table. In fact, there are some compelling reasons to consider refinancing despite your upcoming move. Here are just a handful.

1. Substantial debt reduction
2. You have real estate investing goals
3. Your primary objective is to lower your monthly payment
4. Potential savings

1. Substantial debt reduction

Refinancing with a cash-out refinance could swap home equity for funds to pay off high-interest consumer debt. The added benefit? Homeowners are able to deduct mortgage interest on their taxes, which is why it may make more financial sense to roll the debt into the new mortgage.

“Putting higher interest rate debts 'into' the mortgage increases monthly cash flow,” explained Wendy Thompson, President of The Wendy Thompson Team, a mortgage broker and lender. “For example, someone might have consumer debt totaling $20,000 with a minimum monthly payment of $300 to $400 a month…this amount would only be $100 extra each month if included within a 30-year mortgage.”

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2. You’ve got real estate investing goals

Many homeowners leverage a cash-out refinance for money to put down on an income property, but even if you’re looking to keep your current home and turn it into a rental, you should consider refinancing. This way, the mortgage on the property is at the lowest interest rate and monthly payment possible, which will yield more profit each year.

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3. Your primary objective is to lower your monthly payment

Some homeowners may need relief sooner rather than later. But what about closing costs? Certain lenders may allow homeowners to use credit to offset closing costs. “Depending on the size of the loan it is quite possible that someone could refinance with little to no costs,” said Thompson. “Let’s say you had a $400,000 loan at a 3.5% current rate and could take that to 2.625% with no closing costs. With the costs rolled in, it would still save nearly $200 a month.”

Without cash needed for closing costs, a homeowner can snag the opportunity to lower the monthly payment substantially without money coming out of pocket.

THIS MORTGAGE RATES MISTAKE COULD COST YOU THOUSANDS

4. Potential savings

With so much uncertainty still lingering a year into the COVID-19 pandemic, we all know plans are constantly in flux. It’s important if the house you’re in currently is not the “forever home” to then utilize a mortgage refinance calculator to see how much money you could potentially save by refinancing.

Specifically, look at the “break-even” date, or when the savings on the loan pay off any closing costs associated with the refinance. For example, on a $300,000 mortgage, closing costs could be 1.5% of the refinanced amount, or $4,500. Let’s assume with the refinance you save close to $500 each month. This means the refinance will pay for itself in 9 months’ time and then, after that, you’ll begin saving money.

Being familiar with the breakeven date on your mortgage refinance is important because it allows you to attach some figures to very important life choices. If the interest rate savings on the new loan are high enough to offset the closing costs within a matter of months, it would still make sense to refinance, but again, it depends on your moving timeline.

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What is the downside of refinancing your mortgage?

Even with the advantages refinancing can provide, there are still many instances when it just doesn’t make sense.

• Home equity: Most lenders require a homeowner to have a certain amount of equity in their home in order to refinance.
• Closing costs: While some lenders allow homeowners credits to offset closing costs, some lenders do not. If you are low on cash, it may not make sense to part with it in order to refinance.
• Adverse market fee: Depending on the amount refinanced, the newly implemented adverse market fee (around $500 for every $100k refinanced) may make the refinance too expensive to make sense.

THIS MORTGAGE RATE MISTAKE COULD COST YOU THOUSAND