Refinancing

March 17, 2020
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Today’s drop in mortgage rates are leaving many with the question “should I refinance my loan”.   There are several rules of thumb that can help you make a more informed decision:

The first question that should be answered is will I be refinancing just to save money or will I be taking cash out?  Since everyone’s situation is different, we’ll just focus on refinancing to lower your mortgage payment so you can save money.

Questions to consider:

  • How much of your current mortgage is left? If it is not that much, refinancing to a lower rate may not be that advantageous due to the costs involved.  If you have had the loan for a good amount of time, you may be paying much more in principle than in interest at this time so a refinancing may not save you as much as expected.
  • Is the new interest rate at least 1% or more below your current rate? If you have a very competitive rate right now, refinancing at ¼ to ½% less may not make good sense if it takes many years to recoup the costs involved with the refi (see below).  However, if you can obtain a lower rate “and” a shorter term (i.e. going from a 30-year loan to a 15-year loan), you can save lot of money over the life of the loan.
  • What will be your monthly savings be? One thing to consider is how long it will take to “breakeven’.  Dividing that savings into the total cost of refinancing should provide you with a good idea as to how many months it would take for the new loan to break even.  If the breakeven amount is 3 years or less and you intend to hold the house for 30, then a refi makes excellent sense; if your intent is to sell the house in 3 years then it probably is not worth the effort.
  • If refinancing makes sense then the next question is “what can I do with the monthly savings”? This would be an excellent time to review your other debt with an eye towards paying that down.  Since you are already used to paying the existing mortgage at a specific amount, applying the monthly savings towards other debt is an excellent use of the funds.  If you don’t have any other debt then some suggestions would be topping off your emergency savings account or increasing your 401K or IRA contributions.  If those are already in good shape, then starting or to an investment account is also a great idea.
  • Finally, shop around and get a few quotes for the refinancing. You will find that there are many costs involved and that each lender charges different amounts for different services.  Also, if you get one rate quote from one vendor, don’t be afraid to see if it can be beat at another lender. 

As always, if you would like to run some projections on the quotes that you receive, please feel free to call us at Thrive Wealth Advisors and we can run some scenarios for you to see how they impact your financial plan.  Good luck!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Thrive Wealth Advisors and LPL Financial does not offer mortgage services or refinancing. Please contact an outside professional for assistance.