facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck

When Does it Pay to Refinance a Mortgage?

Few of us want to re-visit the dark days of 2008. But we fondly remember the benefits of a plunge in interest rates at the time. Back then, many homeowners took advantage of lower rates by refinancing their mortgages, saving a considerable amount of money each month.

Fast forward to the summer of 2019, and interest rates are plunging anew, mostly due to expectations that the federal reserve will lower interest rates in coming months. And that has pushed the interest rate on mortgages down close to 4.00% (and some banks will do even better than that). For a 15-year mortgage, rates are quickly moving below 3.50%. 

This leads many to wonder if a move to re-finance a mortgage makes sense right now. You can only answer that by crunching the numbers. To refinance the loan, you’ll pay fees ranging from 2% to 5% of the loan balance due. That must be compared against the savings you’ll enjoy by having a lower-cost mortgage.

Let’s do the math on a home with that had a $400,000 30-year mortgage opened in 2010 with a 5.00% interest rate. You’ll pay, on average, about $10,000 in closing costs, according to NerdWallet, and your monthly payment will drop around $550. It would take around 18 months for the gains to offset the closing costs.

Of course, you may not want to start the clock yet again with a new 30-year mortgage, so a 15% mortgage may make better sense. That move would lock in a much lower rate, but your monthly premium would go up by around $300 (along with those pesky closing costs). Still, a 15-year mortgage today would retire in 2034, instead of the year 2040. If you’ve got the excess cash flow to handle that, then this approach to refinancing may prove to be a very wise choice. 

Also, if you are going to refinance, try to ensure that you have at least 20% equity in your home. That way, you can avoid the extra costs associated with Private Mortgage Insurance (PMI).

By the way, if you are carrying an adjustable rate mortgage, this may be a very good time lock in a fixed rate. The current level of interest rates may not last very long, and having a fixed mortgage simply makes more sense if you think you’ll be living in your home for years to come.

Watch the mortgage market. Mortgage rates have room to move even a bit lower from here, if the federal reserve goes through with a pair of interest rate cuts.

For the best answers, pop into your local bank and have them crunch the numbers. And remember to have this discussion with at least two or three banks. You may find that one of them has an especially good deal.