Can you save money by refinancing your mortgage?
The Federal Reserve Bank has dropped short-term interest rates to rock bottom.
The St. Louis Fed offers FRED, an app to track economic data. FRED says the 30-year fixed-rate mortgage average is at a low not seen in over 10 years. I’ve been checking weekly for a couple of clients and am ready to do some analysis.
Perhaps you are in a similar situation. If you plan to stay put in your home for a few years and if the interest rate on your 30-year mortgage is above 3.75%, refinancing may save you money with a lower monthly payment, freeing up cash. Before going further, check out these three steps:
Step No. 1: Check interest rates from three banks or mortgage brokers. Some institutions post their rates. Some rates are available on sites such as Bankrate.com or NerdWallet.com, but those rates may not always be what you get. Many institutions require some personal information in order to get a quote.
Examine the three lowest quotes. Those are likely to be similar, but I’m always surprised at the variation among lenders.
Step No. 2: See if it saves money. To get initial feedback, NerdWallet’s Refinance Calculator requires the bare minimum of data: the original amount on your mortgage now, the year you took it out, the interest rate and the term.
You’ll need the new mortgage’s term (I like to use time left on the old loan), the new interest rate and a rough estimate for closing costs. It graphically shows you the break-even time to recoup the closing costs and it calculates the total savings. (The monthly savings is the difference in the mortgage payment, using principal and interest only.)
The industry’s rule of thumb is to break even in two years or less, which implies you’re staying in your house that long.
Step No. 3: Having passed that test, go in depth.
The AICPA has a robust website of financial tools at 360FinancialLiteracy.org/Calculators. Go back to your top three lenders for more data: estimates for the loan origination rate, any points to be paid and a projection of other closing costs. Enter all your data on the site’s Refinance Breakeven tool.
The first break even measure shows when closing costs are recouped. The second break even statistic shows when the savings on interest expense and PMI covers the upfront closing costs.
There’s more to review, but those two measures are the most important.
Paying points may trip you up before Step No. 3. AICPA’s tools includes a Mortgage Points Calculator where you can enter loan balance, term, interest rate (when you’re paying points) and how much those points cost you.
The analysis shows the difference in payments in 10 years and in loan balance at that point.
But I prefer to calculate the break even on when the cost of points is recouped: how much those points cost you divided by the difference in monthly payment divided by 12. Will you be in the home that long? If so, then paying the points to get the lower interest rate pays off for you.
Many financial planners like me help clients evaluate refinancing opportunities. You can analyze your own situation, using FRED, NerdWallet and the AICPA’s financial tools website. Other resources are commonly available but can be more tedious or skimp on the analysis.
What’s most important? Run the figures before you give the nod.
Sandi Weaver is a Certified Financial Planning professional and member of the Financial Planning Association of Greater Kansas City. She works on the Wealth Management Committee in the Missouri Society of CPAs. Ann Wilkinson of First National Bank assisted with this article.