In this season of thanksgiving, there may be something to be grateful for that you hadn’t thought of: refinancing.
Refi is something we haven’t heard much about over the past couple of years. But this year, mortgage rates have been slowly, steadily dropping, and the conversation has begun.
Since January, rates have been drifting downward from a high of 7%+, and are now coming very close to 6%. That doesn’t help at all if you have a mortgage from the pandemic 3% days. But if you are locked in at an upper-6% to 7% rate, it could make a difference.
So, is it time to refi? As usual in this business, the answer starts with “It all depends.”
First some background. The traditional rule of thumb has been that for a refi to make economic sense, your new rate had to be at least 1% point lower than your old rate. Refi costs money. There are charges attached to obtaining a mortgage, and your new payment had to be enough smaller than your old payment to pay you back for the up-front cost.
But that calculation has shifted. The proper calculation depends on two things: your monthly savings with the new rate, and how long you plan to stay in the house.
Total amounts borrowed to buy a house have grown considerably in recent years due to significant inflation of real estate values. But there has not been similar inflation of loan origination and other closing expenses. The result: a relatively smaller percentage of reduction in your big monthly payment can have the potential to pay you back for your loan origination costs within a reasonable time frame.
An example: It cost $3,500 to obtain your refi mortgage, and your payment is $290 a month less than before. Dividing the $3,500 by $290 means you will pay yourself back for the loan origination cost in 12 months. If you plan to keep the house longer than a year, you are dollars ahead.
Of course, you need to look before you leap, and for once in this space, I’m not going to recommend you talk first to your full-service realtor. Talk first to your mortgage lender to help you with the calculations. And if you don’t have a lender you trust, talk to your realtor. I can help with that.
If you’re paying on a high-rate mortgage from even a few months ago, have a look at a refi. You might be thankful you did!