Should I refinance?
Mortgage rates are at historic lows. According to Bankrate, the national benchmark rate for a 30-year fixed refinance mortgage is 3.16% and a 15-year fixed refinance mortgage is 2.62% (8/27/2020). It is worth noting that rates for refinancing tend be a bit higher than for purchases. Many clients are wondering if they should refinance and it seems like the answer would be, “yes,” however, not unlike many financial planning questions we address, the real answer is, “it depends.”
Yes, refinancing at a lower rate will reduce your monthly payment. But, it may not reduce the total payment you make over the life of your loan. One of the most determinate variables in the refinancing equation is how long you’ve had your current mortgage.
For example, we have a client who was looking to refinance a few months ago. They were 10 years into a 30-year fixed mortgage at 4.375% and were looking to refinance into a new 30-year fixed loan at 3.5%. Sounds like a good move, right? Their monthly payment would drop by $400 which is a savings they would feel right away. But, over the life of the loan, they would actually end up paying an additional $15,000 of interest. Why? Because more of the monthly payment goes towards interest in the early years of a mortgage. When you refinance, you restart the interest clock. In our client’s example, they already paid 10 years of interest. If they continued paying on their current loan at 4.375%, they would pay a total of $128,000 in interest over the life of the loan. If they refinanced at 3.5%, they would end up paying a total of $143,000 in interest.
If the client chose to invest their monthly savings ($400) they could potentially earn more than the additional interest of $15,000 thus making the refinance a more attractive option.
For simplicity sake we are not accounting for closing costs, but they do have an impact on the refinancing decision. Additionally, a new refinance fee – called the “adverse market” fee – is set to go into effect on December 1st of this year. It will add a 0.50% charge to the vast majority of refinances. The fee is applied to the total loan amount. For example, if you take out a $300,000 mortgage, you will pay an additional $1,500 in closing costs.
So, should you refinance? Again, the answer is, “it depends.” How long have you been paying on your current mortgage? If you haven’t had your current mortgage for very long, a refinance is likely more compelling, especially if you can do it before the new fee goes into effect later this year.
Other important questions. How much lower will the rate be with a refinance? What will you do with the monthly savings? Are you trying to shorten the term of your loan?
We have helped many clients work through refinancing decisions. Please reach out if you have questions about your current mortgage or other loans. We are happy to help you determine the best decision for your individual circumstance.
by Liz Bernhard & Danielle Gregory, August 2020
Senior Wealth Advisors at Albion Financial Group
www.albionfinancial.com | 801-487-3700