Should I Refinance My Mortgage?
/The answer to this question is the classic financial planner answer to everything: ”It depends.”
I’ve been hearing this question quite a bit since mortgage loan interest rates have dropped to new lows in recent months. While refinancing may sound like a great deal to get a lower rate or a lower required monthly payment, you should also consider your long-term goal for the mortgage, how much interest you’ve already paid on your current loan, as well as the fees and time involved in the process of refinancing.
Consider if you took out a 30-year, $300,000 mortgage 10 years ago at an interest rate of 4%. You’ve made the regular monthly P&I (principal and interest) payments of about $1,435 each month for 120 months, and now your balance is about $235,000. At this 4% rate, due to amortization schedules, you’ve already paid about $110,000 in interest. If you were to keep making the regularly scheduled payments on this loan for the full 30 years, your total interest paid would be about $215,000 over the life of the loan. Now, let’s say you found a great deal to refinance the $235,000 balance at 2.75% for 30 years. Without any closing costs added to the balance, the new required monthly P&I payment would be about $960. Under this new loan, however, you’ve extended the amount of time you’ll have a mortgage by 10 years and will still pay a total of $110,000 in interest over the life of the new loan. This represents an additional $5,000 in interest paid over the life of your mortgage. As you can see, if your goal is to pay off your mortgage quickly or pay as little interest as possible over the life of the loan, refinancing may not be your best option. If in this same example, however, you refinanced and added back the $500 monthly savings as extra principal payments each month, you could pay off the balance in about 17 years with around $59,000 in total interest paid on the refinanced loan, representing a much greater interest cost savings.
If your goal is to lower your monthly required payment so you have less stress each month making ends meet, refinancing your mortgage may be a good option for you. Using the numbers in the previous example, you could add about $500 of cash flow back to your monthly budget by refinancing. Keep in mind, however, there will always be closing costs and other fees, like home appraisals, to be included in the total amount you’ll spend to go through the refinancing process. Be sure to run the numbers or ask for an unbiased, professional opinion if you’re unsure of the best option for you.
- Margaret Gooley, CFP®, Worley Erhart-Graves Financial Advisors
