Does It Make Sense To Refinance My Home At Today’s Interest Rates?

Oceanview homeowners range from newly minted first-time homebuyers with brand new 95% mortgages at interest rates as low as 3.25%, to longtime homeowners with no mortgage at all……and every possible permutation in between.  This post is intended primarily for those homeowners somewhere inside the range described above.  The short story is that if you have a fixed rate mortgage at an interest rate of 4.5% or more, it may be worth your while to look at refinancing.  Today’s rates are at historical lows of 3.5% for 30 year mortgages, and 2.75% for 15 year mortgages.  Rates can change daily, so keep an eye on the market if you intend to do anything.  For example, whatever action the Federal Reserve takes this week can cause rates to go up or down.  Mortgage interest rates are tied to the bond market, but stock market results have an effect on rates as well.  Click on “Links of Interest” in the Menu Bar above and page down to the “Mortgage Interest Rates” links to get current mortgage interest rates (updated daily) from a couple of local lenders.

In this post, I’m simply talking about refinancing the balance of your current mortgage without taking any additional cash.  I’m not an advocate of cash-out refinancing wherein you take out cash in addition to refinancing your current mortgage, unless there’s a very good, logical reason for it.  In the last decade, a number of Americans got “underwater” (mortgage balance greater than home value) by getting a cash-out refinance prior to the decline of home values in many areas.  I am an advocate of paying off your mortgage as early in life as you reasonably can.  Refinancing can help you do that.  By the way, you don’t have to pay to use a “Bi-Weekly Payment Plan” to pay down the mortgage balance on your current loan any quicker.  Simply calculate what 1/12 of your principal payment is each month, add that amount to each monthly payment and you’ll get the same result at no cost.  It will knock years off of your mortgage term and save thousands of dollars in interest over time.  I’d recommend using an auto payment plan via your checking account at no cost to you that pays by the 5th of each month (just double check with your lender that payment by the 5th has no negative credit reporting effect… absolutely should not since payments are generally not considered late until after the 15th) on any of the scenarios discussed below.

The following is a quick synopsis followed by a couple of detailed examples, along with calculator links for those of you who are into playing with numbers like me.  Let’s just figure some ballpark numbers in this example:  If you plan on staying in your home for a while and you can reduce your current fixed mortgage interest rate by 1% through refinancing, it makes sense to take a further look.  If your mortgage balance is currently $300,000, a 1% interest rate reduction would save you approximately $3,000 (1% of $300,000) the first year.  Divide that by 12 and you see it’s a savings of $250/month.  If you were to refinance, yet continue making your current payment, all of that savings would go toward principal reduction.  As a result, you’d get more money when you sell your home or your loan would pay off a lot quicker if you stay.

There is a cost to refinance, but it varies from scenario to scenario.  Costs can generally be rolled into the loan balance or paid upfront.  I’ve use higher end refinance cost scenarios in the examples below.  Do you have an FHA, VA or conventional loan?  Is your current loan balance to home value ratio above or below 75%?  What is your current debt to income ratio and credit rating?  Answers to these questions will help determine if an appraisal is required, if you can get a “streamline refinance” and the various costs and fees.  The best place to start is by contacting your current lender and asking about your refinance options.  Do some preliminary research & calculations and get answers to all of your questions.  If not satisfied with the answers from your current lender, contact another lender.

As a Realtor, I’m not typically involved in refinancing since it doesn’t usually involve a purchase or sale, but I enjoy crunching the numbers to determine possible scenarios.  Hence, the more detailed examples below.  You can do the same thing with your mortgage numbers using the calculator links provided after these examples.  The linked calculators happen to be on the Homestate Mortgage Website, but there are dozens more calculators available online by Googling “amortization calculator”.

Example 1:  You refinanced your mortgage balance of $210,000 two years ago at a 30 year, 4.5% fixed rate.  Your payment (principal and interest only) is $1,064.04/month.  Your tentative plan is to sell your home in five years.  Your current loan balance after the first 24 payments is $203,068.80.  Using the mortgage interest payment calculator via the link below, you see that if you continue making payments on your existing loan, the mortgage balance will be $195,486.11 exactly two years from now and $182,755.14 in five years.  Then using the “extra principal payment calculator” link below you are able to determine via the payment chart that if you refinanced your current balance of $203,068.80 for 30 years at 3.5% and continued making the payment of $1,064.04/month that you’re making on your current mortgage, your mortgage balance will be $191,358.64 exactly two years from now and $172,184.76 in five years.  Therefore, even if your cost of refinance was $4,000 in today’s market, you’d be money ahead in less than two years.  In other words if you refinance, your mortgage balance would be $4,127.47 lower in two years and $10,570.38 lower in five years than if you’d simply done nothing and stayed with your current mortgage.

Example 2:  You got a 30 year fixed rate mortgage back in 2002 in the amount of $240,000 with an interest rate of 6.25%.  The payment (principal and interest only) is $1,477.72/month and the current balance is $202,170.72.  You have 20 years of payments left, but intend to sell the house in five years.  Using the mortgage interest payment calculator via the link below, you see that if you continue making payments on your existing loan, the mortgage balance will be $172,344.90 in exactly five years.  Then using the mortgage calculator again, you calculate the payment on a refinanced 30 year mortgage at 3.5% on your current balance of $202,170.72.  You determine that your new payment would be $907.84/month, a savings of $569.88/month.  With that said however, when you look at the payment chart for the refinanced loan, you see that your mortgage balance would be $181,341.01 in exactly five years.  That’s $8,996.11 more than it would be if you stayed with your current mortgage.  However, if you continued making your current payment amount of $1,477.72/month on the new 30 year, 3.5% mortgage… see from the payment chart on the “extra principal payment calculator” that the mortgage balance would be $144,033.18 in exactly five years.  That’s a savings of $28,311.72 in just five years!  All you did was refinance, but continue making the same payment amount you’ve been paying for the past 10 years!    Then you get to thinking, what if I did a 15 year refinance at the currently lower rate of 2.75%?  You recalculate and find that the payment on a 15 year refinance at 2.75% would be $1,371.97/month, which is $105.75/month lower than your current payment.  Not only that, your mortgage balance in five years would be $143,796.46, which is $236.72 lower than it would have been with the 30 year refinance scenario above wherein you were making your current payment of $1,477.72.  Wow, what if I continued making my current payment on the 15 year refinance scenario?  You hit the calculator again and find that after five years of making a $1,477.72 payment on a 15 year refinance at 2.75% your mortgage balance would be $137,002.87.  That’s $7,030.31 lower than the 30 year refinance with the current $1,477.72/month payment scenario and a whopping $35,342.03 less than if you did nothing and continued paying on your current loan for the next five years!  Obviously, even when you figure in the cost of refinance and reduction in IRS mortgage interest deduction, you’ll come out ahead in less than a year and way ahead after that.

 Click here to go to the amortization calculator link.

Click here to go to the extra principal payment calculator link.  Use this when calculating what loan payoffs and balances would be down the road when making monthly extra principal payments.  Hint:  Input the current loan balance and principal and interest only payment in A1 and A2.  Leave B1 blank or 0.00.  Leave B2 blank.  Input the original loan term (# of years) in B3.  Input the desired interest rate and the monthly extra principal payment amount in the next two spaces.  Leave the final space blank and click calculate.

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