Should I refinance?

Interest rates for homes right now are historically low. I just spoke to a friend of mine, who is in the middle of refinancing his home and got a rate 2.8% for a 30-year fixed. This is crazy low! My parents told me that their first mortgage was at 12% interest and mine was 7.25%. This begs the question of “Should I refinance?”

Though we recommend taking out a 15-year mortgage (see previous blog post), that is not the reason to finance. The only reason to refinance your home is to drop your interest rate or to move to a fixed rate mortgage. If you have an already existing 30-year mortgage at a low rate, you can pay extra each month and it will pay off as if it was a 15-year mortgage. Check out this amortization schedule to determine how much extra it would take per month to pay off your home in 15 years (p.s. it is only going to be the nerds like me who click on that amortization schedule). There is a way to calculate if refinancing is right for you.

The amount of interest you pay a year on your home is calculated on your interest rate and the remaining balance on your loan. For simple math, we will take a $200,000 loan balance at a 4% interest rate. If you were able to drop your interest rate a full percentage point by refinancing the loan to a 3% interest rate, you would save $2,000 in interest a year. If the closing cost for the refinance was $3,500, it would take you 18 months to break even. You would need to stay in your home longer than 18 months to make the refinance worth it. Obviously, the higher the closing costs, the longer it would take you to break even.

If you keep the same loan period, this will also drop your monthly payment because you are paying less interest. Just remember, the goal is to pay off the house early so that you can stabilize your retirement and build wealth. Don’t fall for the trap of doing a cash out refinance, which is fancy way of taking a loan against your house.

This may be a great time for you to refinance, but it is dependent on your specific situation. Schedule a free 15-minute consultation and we can talk about whether it is right for you.

Stay safe and stay well