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Should I Refinance Again?

Financial Planning

October 2016

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Should I Refinance Again?

Refinancing is a matter of crunching the numbers. The real question is, will it save you money? The answer lies in several factors, such as the new interest rate, the new mortgage term, the refi costs and how long you expect to own the property.

With the graduated monetary easing over the past decade, some property owners have refinanced two or more times to take advantage of interest savings. This is particularly beneficial for those utilizing the low initial rates of an adjustable mortgage loan; refinancing before the guaranteed rate ends is a good way to lock into a lower rate for a few more years. The key is to switch to a fixed-rate mortgage before interest rates begin an upward trend.

The nice thing about where rates are today is that the United States is economically in a good place – a slow but continuing recovery. In its September meeting, the Federal Reserve resisted increasing the federal funds rate in an effort to foster maximum employment and price stability. However, Chairwoman Janet Yellen indicated that the economy is on track to begin upward rate adjustments by year-end. So if you’re thinking of refinancing, now would be the time.

One thing to keep in mind is how much you owe on your current loan. Since refi closing costs are generally the same no matter the size of the loan, the numbers scale better for a large balance than a small balance. As a rule of thumb, if you owe around $100,000 or less, work the numbers out carefully because you might end up paying too much in refi expenses to make it worth your while.

Some homeowners may not even be thinking about refinancing because they just bought their home within the last year or two. However, the longer the term, the better the savings. And between interest rate drops this year and having accrued sufficient equity in the home – especially if you put less than 20 percent down but your equity would now appraise at that mark – you might be able to secure a better rate that will provide monthly payment savings, significant long-term savings on interest, and even eliminate your private mortgage insurance.

One of the most important considerations is to check out interest rates on the term you’re interested in. But don’t just check with your local lender; shop around among the big lenders, small banks and online vendors. Interest rates can vary significantly among regions and lenders throughout the country, as do refinance fees.

Here’s an example of how much you could save by refinancing. As of Sept. 11, the average Freddie Mac interest rate for a fixed 30-year mortgage was 3.5 percent. For the sake of comparison, let’s assume the following:

  • In 2006, you bought your home for $325,000 with 20 percent down
  • Your 30-year loan had a 6.15 percent fixed rate, yielding a monthly payment of $1,584
  • In 2010, you refinanced your balance of $237,803 (with $3,000 in refi costs) at the then 30-year fixed rate of 5.05 percent
  • Your mortgage payment is now $1,300 and you are on target for more than $83,000 in savings on interest for the loan term
  • If you refinance this year on your current balance of $213,200 at the current rate of 3.5 percent (assuming $3,000 in refi costs), your monthly payment will drop to $970

The good news is that this new refi would save you about $330 a month, or $3,960 a year. The bad news is that you’re on the hook for another 30-year mortgage. As an alternative option, consider refinancing for a 15-year term at the current (9/11/16) fixed rate of 2.77 percent. In this scenario, your monthly payment would be about $1,469, which is $169 more than what you’re currently paying. But why do it? Because over the term of the new l5-year loan, you’d save nearly $179,000 in interest. Plus the added bonus that you can stop paying your mortgage eight years earlier.

If your home is underwater or has very low equity, bear in mind that the Home Affordable Refinance Program (HARP) has been extended until Sept. 2017. You might be able to refinance at today’s lower rates via the program’s streamlined application process and, in some cases, without a bank appraisal.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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