Should You Refinance Your Mortgage?

One of the things not mentioned much in the wake of the big stock selloff was the impact on bonds and interest rates.  This has pushed the rate on 15 and 30 year mortgages to levels we haven’t seen since 2012. Today we’ll answer the question, “Should you refinance your mortgage?” (read more below)

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Should You Refinance Your Mortgage

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The Coronavirus Is Also Affecting Bonds

Most of us are aware of what has been going on in the stock market in the past few weeks. Lots of volatility. Big down days, big up days. Just crazy swings.

But, something interesting also happened that nobody really talked about. Yields on bonds plummeted. The yield on 10-year treasuries fell below 1% for the first time ever. And for a moment, it fell below 0.5%

Why is this important? Mortgage rates are closely linked to the yields on 10-year government bonds.  And these record low yields have created a surge in demand to refinance loans.  So, should you refinance your mortgage?  Here are some key things to consider. 

These falling yields mean the interest rates for a mortgage have also dropped. Mortgage rates hit an all-time low in 2012. And we are testing those levels again.

Is it time to refinance your mortgage

Is Now The Time To Refinance?

It may be a good time to consider refinancing the note on your house. So what are some of the things that factor into your decision to refinance or not?

Mortgage Refinance

1. How Much Interest Will You Save?

It takes some time and know-how to compute this. But you can compare how much interest you will pay on your current mortgage to what you’ll pay when you refinance. If there is significant savings, it’s worth looking deeper. 

 

Bonus Tip:

Refinancing may reduce your payment. But consider keeping your monthly payment the same. The extra gets applied to your principal. You’ll pay off your mortgage faster. And you’ll save even more in interest expenses.

mortgage refinance

2. How Much Will It Cost?

Refinancing your loan means some upfront costs. You have origination fees, closing costs, appraisal costs, and maybe some other fees. Do those fees justify the potential savings?

Here's an example

Current Loan

Jane and Bob purchased their house about five years ago.  Their original loan was for $150,000.  The interest rate was 4%.  They have made 60 payments on their house.  

Over the rest of their loan, they will pay about $79,945 in interest expenses. 

Refinance

After looking into refinancing at lower rates, they discovered they will pay about $3,000 in origination fees, closing costs, and other fees.  

The interest rate on their new loan is 3%.  They extend their repayment period by 5 years.  Their monthly payment decreases by $130 per month.  And over the life of the loan they will save over $7,700 in total interest expense.  

Is It Time to Refinance Your Mortgage
click to enlarge

But wait, there's more

They keep their payment the same!

Jane and Bob elect to pay their original payment.  This means they pay an extra $130 per month on the new mortgage.  They will pay it off in 22 years—that’s earlier the original loan.  

Also they will save over $28,000 in total interest costs!

refinance your mortgage

3. Do You Need To Do Major Repairs Or Updates To Your Home?

Over time big things need repaired or replaced. A new roof, a new driveway or new flooring are all big-ticket items. For some, the only way to make those expensive repairs is to tap into the equity they have accumulated. This may be a great opportunity to consider that.

The coronavirus scare has created an opportunity to lower your interest costs. But be careful, check your numbers, and make sure it is the right thing for you to do. If you have questions, talk to a financial planner you know and trust.

Schedule a 15 Minute Call

Do you have a question? Would you like to talk about how we can help you plan for a better retirement?
Click here to schedule a brief 15 minute call.  

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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