Strategies for Refinancing in a Low Interest Environment

What are some good strategies for refinancing during a low interest environment? I get asked that question periodically these days. I’m not here to tell everyone what they already know. And I sure don’t want to spout information that can be found with a simple Google search. But I do have some tips that would be good to consider.

First, let me clear the air and say you should NOT let the low interest rates talk you into buying more house than you can afford. I can’t tell you how often I’ve seen this happen. I understand the allure, but more often than not the people who do this are just barely squeaking by with the qualification numbers.

Now keep in mind that refinancing doesn’t automatically mean moving. Refinancing is simply financing something again, typically with a new loan at a lower interest rate. But a lot of people refinance automatically by moving.

I’ve come across people all over the place who have bought properties or even second properties. And that’s fine if you can afford it over the long term. But if you’re just squeaking by, you can find yourself in a load of trouble if (or when) you run into any unforeseen financial hardship down the road.

House payments may be low, but the costs of home ownership (maintenance, utilities, insurance, etc.) are increasing.

Instead of grasping for that dream castle, I recommend using this time to plan carefully and get into a house that’s more affordable.

Now for the sake of this article, let’s assume you’re interested in that more affordable home. Here are a few of my recommendations:

1. Determine your loan term. A benchmark question to ask yourself is if can you refinance for 10, 15, or 30 years? The sweet-spot for lending would be a 15-year loan fixed rate, with no more than 80% loan-to-value for the best terms.
2. Use your Roth IRA. If you don’t have the money to pay your loan down to the 80%, here’s a tactic that is admittedly very unusual, but can be done. One of our clients was in this exact predicament. We recommended he take out just enough money from his Roth IRA to make sure that he got the best financing on his home. And it worked great! The majority of the money was still in his Roth IRA, but the money he took out helped him get the best loan-to-value possible that fit in his budget.
3. Consider intra-family loans. Let’s say you’re a young person wanting to buy your first home, but you don’t have the money to get your loan down to the 80% loan-to-value. People don’t often realize this, but most of the time parents and grandparents with money in savings aren’t earning much interest because interest rates are so low. So sometimes parents are able to use their savings to help their kids get their loan to 80%. Parents can lock in at 3% for a shorter amount of time at a lower percent to help their kids get into their first house. This is called an intra-family loan, and we’ve had a lot of success with it.
4. Be street smart about the future. Most people are understandably optimistic about their long-range futures, but that’s not always the case. For example, I worked with a young couple who just got a new house. They loved the house and negotiated a very favorable purchase. However, their new home was far from where they worked, and the commute for the couple was extensive. They ended up adding unforeseen expenses to their cost of housing (gas, wear and tear on their cars, etc.). Think carefully about all aspects of life in a potential new home.
5. Consider the community. If we’re up in a space station looking down on the world, where would you want to live? One of the things I do is pull up the Truth in Accounting site and look at the financial health of states and cities that people are moving into. For example, the site shows that for Chicago, Illinois, each taxpayer’s “burden” as of 2020 is $52,000 for Illinois and $39,400 for Chicago. That could be helpful info to know, especially if you are comparing different cities and states!
6. If you’re moving to an area near the ocean, I recommend checking out the National Oceanic and Atmospheric Administration site and researching their sea level rise map. With ocean levels rising, you want to ensure your future home is going to be one of the ones you can actually live in.
7. Do your research. Before you refinance, ask yourself if this where you want to live long term. Remember, the price of the home won’t be your only expense. The national average cost of refinancing is a little under $4,500. And on average, home sellers pay their listing agent a commission of about 6% of the price of their home. I personally use 10%, which is higher than normal, but when you factor in all the little costs of moving, it all adds up. 

Regardless of the low interest rates, refinancing is a big decision. I’m not here to convince you about refinancing one way or the other, but I do recommend giving it some serious thought before you take action. If you need help coming to a decision, contact a Certified Financial Planner™ professional who can provide insights and guidance to help come to the decision that works best for YOU.

To create a financial plan with confidence, look to partner with a CFP® professional. With a CFP® professional, you’re working with someone who has committed to CFP Board, as part of their certification, that they will act as a fiduciary, and therefore, act in their client’s best interests, at all times when providing financial advice to a client. Visit www.letsmakeaplan.org today to find a CFP® professional.