Should you refinance?

Updated: Nov 29, 2020

Refinancing can be a beneficial strategy, particularly as it relates to your home mortgage. With interest rates at historic lows, the benefits of refinancing can result in savings on several fronts. Determining whether or not refinancing makes sense, involves weighing the pros and cons and short and long term cost savings. We’ll dive deeper below and take a look at a few different scenarios.

These are the most important things to consider prior to refinancing: interest rate, mortgage origination and other fees, cost of paying points, break-even period, monthly savings amount, total interest saved and how long you plan on living in your home. First, consider your current interest rate and the new offer’s interest rate. Generally speaking, you’ll want to see at least a .50% to .75% decrease in interest rate for a refi to make sense. That is assuming there’s a cost for you to refinance.

Next, look at total costs of processing the refinance. When factoring in origination fees, etc., which can at times be costly, you’ll need to weigh several variables when taking this into consideration. Ex: if it costs you $2,000 to process a refinance, how long would it take you to break even on the transaction? And, how long are you planning on staying in your home? For instance, if it took you 3 years to break even and you were planning on selling your house in 2 years, it wouldn’t make sense to refinance. However, if you are planning on staying for 10 years, the transaction may be a no-brainer.

Lender’s may offer you a points option as well. Perhaps, you are offered 3.00% on a 30 year mortgage, but 2.75%, with 1 point over the same time frame. Essentially, what that means is that you’ll be paying 1% of the loan amount to the lender, in exchange for a better rate. Taking this option is a matter of math and what makes logical sense. For example: if your mortgage is $400,000, that would be an additional $4,000 added to closing costs to lower your interest rate .25%. Does it make sense? It may over a 30 year period, however, it may not over 5 to 10 years, especially considering the upfront cost. This is where it is important to consider “break-even analysis”. If the monthly amount is pretty minimal, you don’t plan to live in the home long term and the upfront costs are a big hit to your savings, it may not make sense mathematically to opt for the lower rate. Although, the 3% option is more monthly, it’s likely minimal and also allows for you to avoid such a hefty up front fee.

Another important consideration to look at is total interest saved. We recently refinanced our personal property and went from a 15 year mortgage (14 years remaining), back to a 15 year mortgage. The refinance was $0 cost to us, in fact we received a small amount of lender credits. Additionally, long term we will be saving a decent amount of interest, as well as taking on a smaller monthly payment. In our opinion, it was a no-brainer. If we still want to pay it off in 14 years (or even less), we can always make additional payments to the principal amount of the loan.

refinancing calculator for va cash-out loan

As you can see, there are significant benefits to refinancing your home. Most notably, monthly savings and from a long term perspective, years less in payments. Refinances don’t just apply to mortgages, but also to automobiles and even student loans. If you can utilize refinancing to your advantage, no matter what the subject is (mortgage, auto, student loans, etc.), I strongly recommend it. It can help your financial situation and assist in allowing you to reach your short and long term financial goals.

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