Interest Rates Are at All Time Lows: Should You Refinance?

I just bought a new house nine months ago, and got an incredible 30 year fixed mortgage interest rate of just 3.75% – a rate unheard of at the time. I thought I secured my mortgage at the absolute best time ever. While I did get a great mortgage rate, it wasn’t the absolute best time ever because mortgage interest rates are even less expensive right now.

Right now 30 year fixed mortgages can be obtained for less than 3.5%. For just a quarter percent less, it wouldn’t make any sense for me to refinance my home to a 30 year fixed mortgage. But—- I talked to a local lender who could get me a 15 year fixed rate at just 2.75% , a full 1 point lower than my current mortgage.

The way I think, interest (as well as property taxes) are the RENT portion of the mortgage. That’s the wasted money. The cash that goes down the toilet. I like to do all I can to avoid throwing money away.

So the question arises for me, should I refinance to a 15 year loan and save on interest, or should I just keep my awesome loan the way it is?

Pros of Refinancing:

  • I would have my house paid off 14.3 years sooner.
  • No mortgage debt much sooner.
  • I would save $91,808 in interest compared with my current mortgage.
  • Pretty good bragging rights by saying my interest rate is just 2.75%.

Cons of Refinancing

  • I would have to pay an additional $457 every month.
  • I’d have to pay about $3,500 now in closing costs.
  • I’d have to deal with Title Companies that I Hate. (just kidding, I like my friends in the Title industry)
  • There goes my mortgage interest itemized tax deduction.

Now looking at it this way, it absolutely makes sense to me to refinance. Yeah, over the next 15 years I’d pay an additional $85,620 ($457 a month + $3500 in closing costs), but — I’d save $92K. That doubles my investment right?

Well not exactly….

You see, the 1% less interest is one of the reason’s I’d be saving so much on interest, but the other reason is because I’d be paying so much extra principle.

So what if I kept my current mortgage, and just paid the additional $457 a month?

In this scenario, I would pay my house off 13 years early (so a 17 year mortgage term), and would save $69,231 in mortgage interest.

After subtracting what I’d have to pay in closing costs, the 15 year mortgage would save me about $20,000 over the next 17 years.

Looking at the decision to refinance this way is not a clear cut decision. There are still advantages of both, and lets be honest, I’m not really going to pay extra principle if I’m not required too. From a financial standpoint this all comes down to where I think the best use of my money will be. Should I work to pay my house off faster, or should I invest in other avenues?

If you have a mortgage rate of more than 5%, and you plan to keep your house for a while, financially the best decision will be to refinance. Contact your mortgage lender before rates go up. When will they go up? No one knows, probably not for a while. All I know is that whenever I’ve predicted mortgage rates in the past, I’ve been wrong. So if you’re banking on me being wrong, refinance right now.

 

 

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