Should You Refinance Your Mortgage?
The 30-year fixed rate conforming mortgage rate hit a recent high of 8% in October 2023. Today it is right around 6.5% (source: Freddie Mac)
If you recently financed a home with a mortgage, eventually you will likely wonder if you should refinance.
But how can you tell if refinancing will help you or hurt you?
Often people choose to refinance to:
- Reduce their interest rate
- Reduce the number of years left on their mortgage
- Or tap into the equity in their home
But it’s not just about lowering your monthly payment! You need to consider all the costs involved in refinancing to determine if it will truly save you money.
Here’s what you need to know:
- How much longer you plan to stay in your home
- The closing costs associated with refinancing your mortgage
- The new interest rate on your mortgage
- The new monthly payment amount on your mortgage
Then run this simple math…
Closing costs / Monthly savings = Breakeven time
If breakeven time > time planned to live in the home…The math says “do not refinance”
If breakeven time < time planned to live in the home…Then refinancing makes sense.
SCENARIO 1
Rick and Keirsten are considering a refi with the following details:
- Current Interest Rate: 7%
- Current Monthly Payment: $4,000
- New Interest Rate: 5%
- New Monthly Payment: $3,200
- Closing Costs: $6,000
- Monthly Savings: $800
How much longer do they plan to stay in the home? At least 60 months (or 5 years)
If Keirsten & Rick refinance their home, their monthly payment falls by $800.
But monthly payment isn’t everything. They need to factor in the closing costs. With $6,000 of closing costs, they would need to stay in their home for at least 7.5 months for the refinance to be worthwhile…
- $6,000 / $800 per month = 7.5 months
- 5 months is less than 60 months
Yes, the math says that Keirsten & Rick should refinance
Doing so would result in savings of $800 every month after the breakeven period of 7 1/2 months ends.
SCENARIO 2
Jim and Kathy are considering a refinance with the following details:
- Current Interest Rate: 6%
- Current Monthly Payment: $3,000
- New Interest Rate: 5.5%
- New Monthly Payment: $2,800
- Closing Costs: $4,500
- Monthly Savings: $200
- Amount of time they plan to live in the home: 18 months
If Jim and Kathy were to refinance, they drop their monthly payment by $200.
BUT…..with $4,500 in closing costs, it would take 22.5 months to hit the breakeven point.
- $4,500 / $200 per month = 22.5 months
- 22.5 months > 18 months
Jim and Kathy plan to stay in their home for too short a period of time to make the refinance worthwhile.
The key to deciding whether to refinance is to calculate the breakeven point in months. Then, determine if you plan to stay in your home beyond that point.
Raymond James Financial Services, Inc. does not provide advice on mortgages. Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.
The above-referenced scenarios are used for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.
The views expressed herein are those of the author and do not necessarily reflect the views of Raymond James & Associates or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
