When mortgage rates are low, should you refinance? Part 1: The basics
As I draft today’s post, mortgage rates aren’t the lowest ever, but they’re low enough to leave many homeowners wondering whether to refinance to the lower rate.
Should you refinance? Since it takes time, money and the right circumstances to justify it, the answer is: It depends. Today, I’m launching a three-part series to help you decide, starting with three key considerations.
Interest rates: All else equal, the lower the rate, the better. But be sure to compare apples to apples when shopping around. For example, shorter loan terms offer lower rates, but require higher monthly payments, since you’re paying off the loan in less time (e.g., 15 vs. 30 years).
Refinancing fees: What’s it actually going to cost to refinance (versus funding a new escrow account with prepaid real estate taxes and homeowners insurance)? Typical refinancing fees include an “origination fee”; “points” (paid optionally to lower the interest rate); home appraisal; recording fees; state & local transfer taxes; title insurance; and the closing attorney. Seek competitive bids, as costs from lender to lender can vary widely.
Your “stay put” years: It’s important to consider how long you’re planning to stay in your home. For example, if you’ll pay $4,800 in refinancing fees to reduce your mortgage by $100/month, you’ll only start saving money after you’ve made your first 48 monthly payments. If you’re planning to move before then, it probably won’t be worth refinancing.
But there’s a catch: How much of your reduced payment is due to lower rates vs. the fact that you’ve extended the loan? Say you refinance from a 30-year mortgage you’ve held for 6 years, to a new 30-year mortgage. Lower rates would contribute to a lower payment. But so would the fact that the new loan is now stretched across 30 years, instead of the 24 years left on your existing mortgage.
To correctly calculate your “stay put” break-even point, ask your lender how much your monthly payments would drop if you paid them off over the same number of months remaining on your existing mortgage, and calculate from there.
That’s enough for now. We’ll offer more ideas in Part 2. Or, if you’d rather not wait, go to https://alliantwealth.com/resources/whitepapers.html to read our full report today.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.