By: Andrew Rosen, CFP®, CEP®

I thought when I got a 4% mortgage a few years ago, I would never see lower rates again. What do you know? I was wrong.

In the past couple of months, mortgage rates have been declining yet again. Today, you can find 30 year mortgages in the mid 3%, and 15 year ones in the low 3% range. This is great news if you’re buying in this low interest rate environment. However, the vast majority of us aren’t currently buying. More people than not have a mortgage outstanding. Given today’s rates, one must consider if refinancing is the right move.

Refinancing doesn’t make sense for everyone. That said, however, there are some situations where it’s worth having a discussion.  Below, I’ve listed some instances where one can, at the very least, consider refinancing.

More than a .5% drop in rate:

Most mortgage professionals suggest not refinancing unless the rate drops .5%. Their reasoning is that the costs to refinance likely outweigh the benefits. The other thing is how far into your loan you are and how long you plan to stay in the home? Remember, mortgages pay a little bit more principal and a little less interest each month. Thus, if you’re on the tail-end of your mortgage, you are paying mostly principal and refinancing benefits are greatly mitigated. Additionally, if you only plan to stay in a home for 5 more years and closing costs are $7,000, your lower payments may not save enough to be worth it.

The good news is, if you’ve purchased a home in the past 3 years, you likely have an interest rate .5% higher than what you can get today AND are still paying mostly interest. These people should consider refinancing.

There is a great financial planning hack that I love: refinance into a lower rate, but still pay your old (higher) mortgage payment. This does two things. First, it lowers the interest you are paying the bank. Second, it has you pay down the mortgage quicker than the loan term.

Just because your loan is older doesn’t mean you shouldn’t look at refinancing. It simply means you might need a bigger drop in rates to make the juice worth the squeeze. I’ve seen plenty of people that have over 5% interest rates for one reason or another. It may make sense for someone with that high of a rate to refinance into a lower term mortgage. This could save 2% and plenty of interest at the end of the day.

Cash flow needs have changed:

This refinancing reason cuts both ways–one can use today’s low interest rates to increase their monthly payments, or one can refinance to decrease. Let’s take a look at both.

Why would someone want to increase their monthly payments? When you bought your home, income and expenses may have been tight. Now that rates are lowered and you are in a different financial place (not to mention having a smaller outstanding mortgage), you may want to consider refinancing. The benefit here would be getting that debt paid off sooner, ideally by retirement, while paying less to a bank for doing so.

The other side is some people have paid down their mortgage a decent amount, but are in a high expense phase (like having children in college). In many instances, people take advantage of a refinance to give some breathing room on a month to month basis. Even though this may increase the timing on when they will be mortgage-free, it still can make living more affordable today.

Lastly, something else to consider is this: your investments over the long term should be outperforming these low interest rates.

Cash out refinance:

I’ve seen clients want to do $50,000 of home remodeling (and/or pay off other debts). The only problem is they don’t have funds to do so. However, they do have 45% equity in their home. One possible strategy is to refinance up to 20% equity and take the additional 25% as a cash out for other projects or debt pay down.

One important disclaimer here–with the new tax bill, a cash out refinance, or home equity line of credit (HELOC), is technically no longer deductible if used for anything except home improvements. Also, if you’re refinancing and your mortgage is over $750,000, it’s important to discuss with your planner and tax professional. You might lose some very important tax benefits!

Get rid of PMI:

Not everyone was able to put down 20% when they purchased their home. This means they are stuck paying extra in the form of Private Mortgage Insurance. Sometimes refinancing–if rates have dropped and the house has appreciated a bit–could kill two birds with one stone. Not only would you have a lower interest rate, but you also get rid of that pesky PMI payment.

Fun with numbers:

And now, some mathematics.

If you have a $400,000, 30 year loan at 4.25%, your payments are $1,967/mo (P&I).

A $400,000, 30yr loan at 4%= $1,909/mo.

A $400,000, 30yr loan at 3.75%= $1,852/mo.

A $400,000, 30yr loan at 3.5%= $1,796/mo.

You can see each quarter percentage point saves you roughly $56-$58/mo in payments. So, when you’re at home doing the math, it’s important to figure out how much you are saving monthly. Then find out the closing costs and how long you plan to be in that home. This should give you, at the very least, a break even. If it’s still appealing, then call a professional to talk through more detailed numbers. We’ll help you determine if you are a perfect candidate to refinance.

We can help:

Refinancing is one of the services we pride ourselves with being able to help our clients and prospective clients work through. We have numerous top notch mortgage professionals at our disposal and we’ll hold your hand during the refinancing process. Operators are standing bye, so give us a call and we will be happy to help!

Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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Financial planning and Investment advisory services offered through Diversified, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC.  Some associates of Diversified, LLC are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.