Is refinancing right for me?

Real Estate
#1

Hi Jeremy,

We have owned our home for 1 year and a few months. We put down 20% and currently have a 30 year fixed mortgage with a 3.75% interest rate. Obviously, rates are lower during these times and I recently got a letter in the mail advertising a much lower monthly payment at 2.75% interest rate for a 30 year fixed. It also says there are options for no or low closing costs and no out of pocket expenses. We plan to be here for the next 5-10 years, if not longer.

Should we refinance?

As always, thanks for your sound advice!
Anna

#2

Hey Anna!

When you refinance, they actually add MORE debt on top of your existing loan for the bankers to make their profit on the deal. That might still be worth it if the interest rate is lower, but that only is true if you keep that loan for many years (breakeven is usually around 5 years). So if you sell, refinance, or otherwise pay off the loan sooner than 5 years then refinancing is rarely worth it.

So some things I would consider:

  • How long do you plan to live there (you said 5-10+ years)
  • Would you refinance again (doubtful… rates can’t really fall)
  • Could you overpay your mortgage? (i.e. if you’re on a plan to pay it off in 10 years, the refinance might not be worth it).

All that said, I’d go google refinance calculator, and try a few to see when your break even is. Based on what you said, I might go for it. 2.75% is crazy low.

Jeremy

#3

Hi Anna,

I’m in a similar position. I’ve owned for 2 years, put 20% down and last year refinanced to a 15yr fixed at 3.75%. I did a lot of math and was debating whether to make extra principal payments or to refi. I decided to refi since the rates are so low. My break even point would be less than a year (so closing costs and fees will be made up for). I like the idea of having a lower monthly payment. With the extra money per month I plan on either investing in index funds or throwing extra money towards the principal. I wish you luck!

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#4

Hi Anna,

Real estate and mortgages is my specialty.

Jeremy is right - your loan amount will increase due to one time closing cost fees as well as adding on prepaid insurance/ property taxes if you have an impound account, otherwise we would just add closing costs fees.

I usually ask clients how long they plan to stay in the home, then we look at how much they save per month and if that would be worth it by the time they sell.
You could also drop the payment and put a renter in there if the numbers make sense?

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