We get this question a lot: “Should I refinance my house right now?” The answer for many is probably yes. A lot of people in America are “in-the-money” when it comes to their mortgage. What that means is that many Americans likely have a higher interest rate than necessary and could be leaving some potentially considerable savings on the table. Here is some of the common follow-up questions we get as well.
What are the common reasons people choose to refinance?
- To receive a lower interest rate on the outstanding balance of your loan. This is great! PFA recommends this, and you may be “in-the-money” to receive this.
- To receive a lower interest rate AND reduce the term on the outstanding balance of your loan (i.e. going from a 30-year to a 15-year fixed-rate mortgage). This is even better! PFA definitely recommends this.
- To receive lower interest and tap into your home’s equity. The last point is something we never recommend. We want you getting out of debt, not getting into it. We also want you collecting interest, not paying it. This breaks both of those rules. This is borrowing from your future, which is almost never advisable.
Are interest rates really THAT low?
- Yes, interest rates are at historically low levels. Many of us likely will not see them this low again. This chart really illustrates where they are compared to the last 50 years. Refinancing now into a fixed-rate new mortgage will allow you to lock in a historically low rate.
How do I know if refinancing is actually a good thing for me?
- Very simply, you need to know what your breakeven point is. If you pay $6,000 in closing costs to get a new loan with a lower interest rate, and then sell your house 2 months later, you probably threw away $6,000. Therefore, you have to figure out what you are saving. We will go through a simple example below.
- To make it easy, we will not include home insurance and property taxes. We are also assuming the home has been owned for 8 years before you are thinking about refinancing, and that you have not been making extra principle payments. You are considering refinancing a 30-year mortgage at 4.50% into a 22-year mortgage at 3.00%. Also, you are quoted $6,000 in total closing costs.
- In this example, the breakeven point is 28 months. Basically, if you are planning on keeping your house longer than 28 months, then your monthly payment savings will have offset what you spent on closing costs. Note the total interest savings! Hopefully, you can see the short and long-term savings that comes from refinancing.
Where is the best place to refinance?
- Often, we get asked “Where is the best place to refinance my mortgage?”. As far as we are concerned, we dislike all banks equally. We believe the best place is a local credit union, small hometown bank, or mortgage lender. Some online lenders work as well.