Ripe for Refis

Ripe for Refis

Published On: August 21, 2019

Written by: Ben Atwater and Matt Malick

Since November of last year, interest rates have been in near freefall.  As the Treasury yield curve has flattened and inverted, 30-year and 15-year mortgage rates have plunged to the lowest levels since 2016.  Not surprisingly, homeowners have responded with a flurry of refinancing.  According to the Mortgage Bankers Association, refinancing loan volume is up 70% year-over-year.

For clients with outstanding mortgage balances, particularly with many years left until the loan’s maturity, it may pay to review your current interest rate and consider refinancing.

As an example, let’s consider a borrower who purchased a home in August of 2018 for $500,000.  If we assume a down payment of $100,000 and a 30-year mortgage at 4.50%, his monthly payments would be about $2,027, excluding property taxes and homeowner’s insurance.  As of today, his remaining principal balance would be $393,547.

If this hypothetical borrower refinances to a new 30-year loan at 3.60%, and we assume $10,000 in closing costs that are financed over the term of the new loan, his monthly payment would drop to $1,835 for a monthly savings of $192.  More importantly, he would save about $45,000 over the life of the loan.

Taken one step further, if he invested the $192 of monthly savings over the next thirty years in a balanced investment portfolio and earned a 5% annualized rate of return, he would accumulate nearly $160,000 in additional portfolio value by the time the loan term ends. 

In this first example, refinancing makes financial sense.  But it’s important to examine the terms of both your current and new mortgage with an eye toward total lifetime expense and opportunity cost. 

For example, let’s consider a borrower who purchased a similar home five years ago, in August of 2014, financing $400,000 with a 30-year mortgage at 4.10%.  Her current principal balance would be $362,371.  Refinancing into a new 30-year mortgage at 3.60% with the same $10,000 closing costs would drop her monthly payment to $1,693 for a monthly savings of $240.  However, because she would be adding an additional five years to her loan, her lifetime outlay would increase by about $29,600.  In this case, it would be important for the borrower to pay additional principal over the life of the loan and / or invest the monthly savings.  Otherwise refinancing could be fruitless over the long-term.

It might also be a good time to evaluate if you can afford a higher mortgage payment.  If you have more than 15 years remaining on your mortgage and an interest rate north of 3%, you may be able to refinance to a 15-year mortgage, save on lifetime interest costs and pay off your home sooner.  This may particularly suit someone who has a goal of paying off their mortgage ahead of retirement. 

If you have an outstanding mortgage balance and you’d like to discuss refinancing, please reach out to us.  We can help you crunch the numbers and put together a long-term plan.

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