To Refi or Not to Refi, that is the question

To Refi or Not to Refi, that is the question

January 31, 2021

To "refi" or not to "refi"

The question posed to us most frequently recently involves whether to refinance a current mortgage. Our response evaluates both qualitative and quantitative factors that can be unique to each person. These include: how long you plan to stay in your current home, what your current interest rate and term is, what is your mortgage balance, what is your current tax bracket and is your mortgage interest still deductible, how much available cash do you have, what is your monthly budget and cash flow looking like, what is your credit score, are you currently receiving "guaranteed" income, and how do you feel about stock market risk versus the good feeling that come from having a paid off mortgage. Plus other factors that may come up in a conversation that I didn't think to list here.

Based on your current fact pattern, we can help you weigh some of your mortgage options:

Refinance your current mortgage - if you can reduce your current rate by about 1/2%, then this is a good start. Generally, you are looking for short "break even" point for the costs of the refinance (and definitely within the time frame that you anticipate staying in your home). We'll explore whether a shorter term (going from 30 years to 15 years) makes sense with regard to a lower interest rate but a higher monthly payment. Keep in mind that some of the apparent reduction in the monthly payment for refinancing to a new 30-year mortgage is simply that you are spreading what is now a lower mortgage balance over a new 30-year time frame. We want to make sure you are actually saving money - unless lower payments is a more important goal.

Pay off your mortgage - taking a lump sum of cash from your savings once your mortgage balance has gotten to a certain point can make sense. It avoids the hassle and cost of refinancing. You could use money that's sitting in a bank account making very little in interest and eliminate interest rate charges that you don't need to be paying. This can buy you peace of mind. There are pros and cons here that we can evaluate.

Recasting your mortgage - For a small fee (perhaps $250), many mortgage companies will let you make a lump sum payment (for example, $50,000) against your current mortgage. While you keep your same interest rate and mortgage term, your monthly payment is reduced going forward. This can be a nice trade off for using some cash that isn't making money at the bank, but you don't want to put all your money into your home, leaving you cash strapped.

Make additional monthly payments - If refinancing doesn't make sense and/or you don't have a big pot of money to put against your current mortgage, then simply adding more money periodically or whenever you feel like it against your current mortgage can still save you money in the long term. And it feels good.

Do nothing - Sometimes this is the right thing to do (or not do). If you already have a good mortgage rate, you don't have extra money to put toward your current payments, and/or you have enough stress in your life, this is an option. And given that rates may stay relatively low through 2021 and even perhaps well into 2022, we don't expect that you need to rush into this.

As you can see, there are many factors to weigh and different options might be best for different people.

Some additional thoughts about refinancing right now. Debbie started her refi application in late August and has not yet closed! Mortgage lenders are very backed up. In addition, refi rates aren't necessarily as low as those offered for new purchases, so keep that in mind when you see great rates advertised. Rates for refinancing may be 0.50% to 0.75% higher.