“If I refinance my house today, I could save an entire percentage point in interest! It’s a no-brainer, right?!”
Just because you can save 1% on something doesn’t automatically mean it’s a good idea, ESPECIALLY when there’s an up-front cost of doing it.
Should You Refinance Your Mortgage?
Just a few months ago, rates for a 15-year and 30-year mortgage were 2.7% and 3.4%, respectively. Today, since the Fed has decided to raise the interest rates, mortgage rates have followed suit and stand at 3.18% and 3.95%.
So the big question is: With mortgage rates on the rise, should you refinance your mortgage?
Well, just like almost every decision in this world….it depends….
How Much Does It Cost to Refinance Your Mortgage?
So many people go into a mortgage refinance completely blind. They know they can save on interest and that it’s probably the right thing to do, but they never really know how much it’s going to cost them until they’re already in the process. This is NOT the position you want to put yourself in.
The following are the typical charges you’ll see if you refinance your mortgage:
- Mortgage application fee: $250-$500
- Appraisal report: $300-$600
- Loan origination fee: 1% of your home’s value
- Document preparation fee: $200-$500
- Title insurance: $400-$800
- Recording fee: $25-$250
As a rule of thumb, a mortgage refi will cost about 1.5% of your loan amount. If you’re re-borrowing $200,000, plan on a total cost of around $3,000.
If you’re still scratching your head, then look up what it cost you to close on your house in the first place. Chances are it won’t be much less for a mortgage refinance.
When You Shouldn’t Refinance Your Mortgage
Sometimes if you want to figure out if you should do something, it’s easier to come up with the scenarios where you shouldn’t do it. This is going to be the best method for figuring out if you should refinance your mortgage.
1) If You Plan to Move in 3 Years or Less
It’s going to cost you thousands of dollars to refinance your loan, and it will come with a bunch of hassle too. If you plan to sell your house and move in three years or less, then I’d recommend forgetting about the refi altogether.
2) If You’re Nearing the End of Your Mortgage
Remember when you first got your mortgage and looked at the payment breakdown? It probably looked something like this:
- Escrow: $250
- Interest: $850
- Principle: $50
All of your money was going to the interest! It’s not necessarily a conspiracy, but the interest payments are front-loaded on most mortgages, which means that if you’ve only got a few years left, then you’ve basically paid all of your interest already! So…it pretty much goes without saying that a refi is not wise at this stage of the game.
3) If the Payback Time-frame is Longer Than Three Years
Let’s say it costs you $3,000 to refinance your mortgage and it reduces your payment by $50 a month over the same repayment term. How many months will it take for you to break-even on your initial $3,000 investment?
60 months — so 5 years — Womp wommmm!! That’s a bad deal. Heck, if you follow my plan, you should have your entire mortgage paid off by then! In almost any business, if the investment doesn’t pay you back fully inside of three years, then it’s simply not worth doing.
To figure out how long it will take you to pay back your initial refinance costs, just take the total estimated cost and divide it by the monthly savings result from the widget below! (ie. $3000/$50 savings each month = 60 months). Your simple math result is the amount of months it would take to repay your costs. Anything over 36 months and it’s just too long to hassle with. (On your mobile and can’t see the widget? Click “Full Screen View” at the very bottom of this page)
When It’s Time to Refinance Your Mortgage
With mortgage rates at their all-time lows in late 2016, it’s not too likely the they’re going down again. What’s more likely is that the Fed will continue to raise interest rates slowly over time, which of course means that mortgage rates will slowly rise right along with them.
If you believe (like I do) that the rates are on their way up, then deciding whether or not to refinance your mortgage just comes down the the three questions that we introduced earlier:
- Will you stay in your house for the next three years (at minimum)?
- Is your current mortgage in the beginning half of the full-term (ie. less than 15 years into a 30 year term)
- Is your payback time-frame less than 3 years?
If you can answer yes to all of these questions, then absolutely, refinance your mortgage! After all, once you get past your break even point, everything after that is 100% money in your pocket!
Will you refinance your mortgage today? How much could you save?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.