When Does a Refi Make Sense?

by Glenn J. Downing, MBA, CFP®

With mortgage rates so low, we’ve been looking at mortgage refinancing for a few of our clients lately, to see if it might be in their best interests.  Here’s what we know: 

• For those with strong credit, 30-year rates are just below 3%, and 15-year rates are in the 2.6% range. This makes sense in that the lender takes on less risk in loaning out mortgage funds for just 15 years, as opposed to 30 years.  Consequently, there is a better rate on offer.  The rate difference we see here, about 0.4%, won’t be enough to compensate for lopping 15 years off the payment period.  It’ll help some, but the 15-year mortgage will definitely carry a higher payment. 
• It costs money to initiate a new mortgage – as much as 3% to 5% of the mortgage itself. There are lots of costs and taxes involved, including application fee, title search, title insurance, appraisal, transfer taxes, etc.  Typically people roll these into the new mortgage.  It would take a few years of payments on the new mortgage, then, to get the balance down to what it was on the old mortgage.  Of course, if you have the cash, you can come out of pocket for these expenses. 
• If you’re going to refi now, take a fixed rate mortgage, and not a variable rate. There is a lot of risk in a variable rate.  We don’t know what will happen in the future.  I do remember the 70’s when people were taking out mortgages at 16%.  If it happened then, it can happen again.  Since rates are at historic lows, this is the time to lock a low rate in. 

I’ve written two related blog posts that you might find useful:  Should I Pay My Mortgage Off Early? and The Fifteen Year Mortgage.

There is a 2% rule of thumb out there, and I do believe it is largely true – namely, that it makes sense to refi when there is a 2% drop from your current rate to your new one.   Refi for a lower payment if you need to, but we’d prefer you to refi to a shorter payoff period, and keep your payment the same.  

If you’re down to the last 5-7 years of your mortgage, you’re paying very little interest – mostly principal. It generally won’t make sense to refi.

So have a look – if you’re paying in the upper 4%s for your current mortgage, it might be time to re-evaluate.  We know several terrific mortgage brokers we’re happy to recommend.  Please know that if we do make a referral, there is no quid pro quo:  we never pay nor receive referral fees.)

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