Is It Time to Refinance?

Interest rates on mortgages have flopped like a World Cup midfielder since the pandemic hit. According to Bankrate.com, the average rate of the nation’s largest mortgage lenders for 30-year mortgages is 3.15% while the average 15-year rate is 2.75%. So, is now a good time to refinance your current mortgage?

A few broad guidelines are probably helpful to start:

1. Since interest rates were already low, simply lowering your rate probably won’t benefit you much unless you also shorten the term of the loan.
2. If you can reduce your interest rate and also shorten the term of the loan while keeping your monthly payment close to the same, that’s about as close to a no-brainer as they come. Pay close attention to closing costs, however.
3. If reducing the interest rate and shortening the term means adding a couple hundred dollars to your monthly payment, time to think twice. Investing that extra $200 per month should earn more over the term of the loan than it will save in interest, so deploying it in your 401(k) or 403(b) is probably the better financial move.

The numbers from our examples above:

1. Reduce rate and term: Let’s assume your current mortgage borrowed $250,000 at 4.25% over 30 years for a monthly principal and interest payment of $1230. After 5 years paying on this mortgage, if you refinance the remaining balance of $225,000 for the national average of 3.15% for 20 years, the new monthly payment will be $1265. Shorter term for roughly the same monthly payment = good deal.
2. Same as above but the new offer is to refinance the remaining balance of $225,000 at 2.75% over 15 years for a new payment of $1527 per month. That’s a $297 per month increase. Earning an estimated 7% average annual return on that $297 is better than saving 2.75%. So, take a pass on refinancing here and invest that $297 per month into your 401(k) or 403(b).

While this pandemic has been tough on all of us, the silver lining could be an opportunity to refinance and save a lot of interest expense and be mortgage free sooner. As the expression goes, a crisis is a terrible thing to waste.

Steve Byars, CFP®