Question: For several months I have been thinking about refinancing a mortgage. Just as I was about to lock in my rate a few months ago, the mortgage company announced that my rate had increased from 2.75% to 2.875%, so I refused. After a few weeks, the rate went up to 3.25%, and I felt uncomfortable waiting. Now the rates have dropped slightly and I am thinking about refinancing again. Here’s my question: should I lock in my bet now or wait for them to fall further?
Respond: Sorry, but you are asking a question that cannot be answered. I have no idea where the interest rates will be tomorrow, next week, or next month, and anyone who tells you otherwise is probably trying to sell you something. Perhaps a better question to ask is whether refinancing at the current market rate makes sense or not. A related question to consider is whether a small change in rates has a big impact on your overall financial picture. In either case, I don’t think the difference between 2.875% and 3.125% will have a big impact on your future.
The decision to refinance is a simple matter that refinancing will save you a lot over time compared to what refinancing will cost you right now. If refinancing saves you more than it costs, then refinancing will improve your fortune. However, if the cost of refinancing is higher than the amount you expect to save, refinancing will actually lower your overall wealth and should be avoided, even if rates are low and all your friends are refinancing.
When you refinance your mortgage, certain costs are one-off, meaning you only pay them once at the close of the loan. One-time expenses include expenses such as loan processing fees, real estate appraisal, title company services, credit reports, notary services, etc. In general, one-time fees are usually around $ 4,500 regardless of the size of the loan.
Lump sum expenses are expenses that you care about when considering refinancing your mortgage. Before committing to refinancing, you should ask your mortgage banker for a detailed estimate of the one-time costs. A professional ethical mortgage professional will work with you to make sure refinancing saves you more than it costs. In fact, if your mortgage banker is not helping you with this, you need to find another mortgage banker.
Now, to see how this all works, let’s look at a simple illustration. Let’s say you owe $ 500,000 on a mortgage for 30 years at a rate of 4 percent. With these terms, your monthly payment of principal and interest is $ 2,387. If you refinance this mortgage up to 3 percent, your monthly mortgage payment drops to $ 2108, which translates into monthly savings of $ 279. If your one-time expenses are $ 4,500, it will take just over 16 months for the refinancing to pay back. If you are staying in your home for more than 16 months, refinancing makes sense.
But suppose you only owe $ 100,000 on your mortgage. In this case, your monthly savings will be only $ 55 and it will take you 82 months, or almost 7 years, to cover the refinancing costs. Refinancing still makes sense, but it is less compelling, especially if there is a chance that you will move within the next 7 years.
After all, the difference between 2.875% and 3.125% on mortgages isn’t that big. On a $ 100,000 mortgage, the difference in payment is a barely noticeable $ 15 per month. With a mortgage balance of $ 500,000, the difference is only $ 68 per month. For most people, saving that little extra amount anyway is equivalent to a rounding error in your overall financial plan. You are much better off refinancing, if it makes sense, and not worrying about trying to squeeze every last drop out of the interest rate.
Stephen S. Murrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes questions you may have regarding investments, taxes, retirement or estate planning. Send your questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email email@example.com.