Mortgage Refinancing ~ What Should be Considered?
Mortgage Interest Rates remain extremely low, oftentimes hovering in the 3% (or even under) range. Many have already taken advantage of refinancing into a lower interest rate from when they originally took out the loan, but not everyone. I get questioned frequently about whether it makes sense to refinance or not so I wanted to point out some considerations here.
1 – What is the Purpose?
For some, the idea of a lower interest rate is appealing… others may want to pull cash out to pay off other debts and some could have enough equity to now drop their mortgage insurance, which could save hundreds of dollars per month. Once you define the “why”, then it’s easier to analyze the figures & logistics.
2 – How Long Do You Plan to Remain in the Home?
This is an important question because refinancing is not free. Some lenders may advertise that is at no cost, but that generally means the interest rate is being bumped a little to offset the closing cost concessions/credit given by the lender. You will want to weigh out how long you must stay in the home in order to make that investment worthwhile. Generally that means staying put for at least a couple more years so if you plan to move soon anyways, probably hold off on the refi.
3 – How Far Into the Amortization Schedule are You?
Most people don’t think about this one… home loans are front loaded with interest so you hardly pay down the principal in the first several years so if you took out the loan 8-years ago and now are looking to refinance, that means you’re moving from a 22-year payoff to a 30-year payoff (unless you reduce the loan period, which will increase your payment). You’re back to paying a lot of interest up front again so are you really saving? You’d need to do the math to find out how much interest you’d pay over the next 360 months versus 22 years left in this example to know for sure.
Let’s take a look at an example situation:
- Original Loan amount – $300,000
- Interest Rate – 4%
- Origination Date – 10/1/2015 (6 years ago)
- Current Loan amount – $265,000
Hypothetical Refi Loan
- Loan amount – $270,000 ($265K Loan + Expenses)
- Interest Rate – 3%
- Cost for Refi – $5,000
- Loan Duration – 30 Years
The total interest left to pay on the Existing Loan if no refinance is made would be $148,144 while the total interest that will be paid for the refinanced loan would be $138,149 so it will save about $10K and drop your monthly payment about $300 even though you restart the 30-year payoff period. However, if the refi interest rate was to be 3.5%, then the total interest payable would be $164,851 and cost someone an extra $16,700+ in the long run.
Two general ‘rules of thumb’ I like to follow are staying in the property for 2+ years and dropping the interest rate by at least a full percent. That doesn’t mean a refinance can’t make sense otherwise, but it may not pencil out as much. For those looking to drop M.I. or cut down the amortization (15-year term perhaps), which usually means a lower interest rate also, then other factors will come into play.
We are always glad to take a look at your individual situation to help guide you in the right direction!