Practical Cents #1: When Does It Make Sense to Refinance Your Mortgage

Hi everyone, and thank you for joining me. We have all heard the phrase marry the house and date the rate. But as rates have stayed stubbornly high these past few years, people continue to be stuck with high mortgage payments, ones they originally anticipated being able to refinance much sooner. Now, with recent rate cuts and the expectation of more to come, we know many are curious as to how and when it makes sense to refinance your mortgage.

It's an important decision, as you are in effect restarting the clock on your mortgage with the hope that your new, lower rate allows you to achieve some combination of the following outcomes: one, meaningfully reduce your current monthly mortgage payment; two, reduce your lifetime mortgage cost; three, speed up the timeline of paying off your mortgage by reducing the term. It's a decision with significant impact and a number of considerations, like how much will I save each month and what other goals can those savings be reallocated to, how much in closing costs will I pay to refinance and can I fold those costs into the new loan, and is now the right time or will I have a better opportunity by continuing to wait?

For starters, you'll want to determine your approximate break-even point, the time it takes to recoup the costs to refinance in the first place. But before breaking out your calculator, a better first question is, how long do I see myself and my family in this house? According to data from Freddie Mac, the costs to refinance are typically 2% to 5% of the outstanding loan balance, and the average refinance reaches its break-even point within a two-to-five-year time frame. So if you had been planning to move in the very near future due to employment, outgrowing your home, or simply wanting a change of scenery, you may be better off using these rate cuts to accelerate your move rather than to refinance your existing mortgage.

Now, for those of you who are in your dream house but with a nightmare of a rate, you'll need to do a bit of math. But as a starting point, using some back-of-the-envelope math, a good general guideline to consider refinancing is if your new mortgage rate is at least 1% lower than your current mortgage rate. For instance, a family with a current mortgage balance of $500,000 that has been in their home for the last two years with a 7% 30-year fixed rate would shave $328 per month off their current payment just by refinancing to a 6% rate. Think about what you and your family could do with the additional savings each and every month.

For some, the math alone is not enough to make a decision where tens of thousands, if not hundreds of thousands, of dollars are at stake. If you find yourself in that camp, reach out. With a decision that has this kind of impact, we want to make sure we're talking through how it fits into your financial plan, both now and in the long run, to help guide you toward a decision that is right for you and your family. Thanks for watching.