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  • Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#73 - Mortgage Refinance #2

Mortgage Refinance #2

This past summer I wrote about mortgage refinancing. It was getting a particular amount of attention as rates were dropping. I wanted to highlight it again today.

First, take a look at the historical 30 Year Mortgage Rate Chart from YCharts.

I wanted to talk through an example to show how refinancing can both save you money and even help you pay off your mortgage sooner.

In our example, an individual purchased a home 2 years ago and took out a 30yr fixed $300,000 mortgage at a 4.5% interest rate. Their payment (principal and interest only) would be about $1,500/mth. Their loan would be paid off in the year 2049 if they made the minimum mortgage payment.

Let’s assume they refinance and receive a new 30yr fixed mortgage at a 3.15% interest rate. Their loan amount is slightly less because they have paid down their mortgage for the last two years. I assumed they rolled closing costs into their loan (not necessarily a recommendation just simplifies the example) and therefore their new starting loan balance is about $295,000. Their payment (principal and interest only) would be about $1,250/mth.

That is about a $250/mth difference between the initial loan and the refinanced loan payment. The easiest way I know to compare if it makes sense to refinance is to assume they pay that extra $250/mth down on the loan each month (once again not necessarily a recommendation just simplifies the example). In that instance, they would save about $100,000 in interest and pay off their loan about six years sooner- in the year 2043.

Given that there are fees to refinance, there is a breakeven period. For example, if you are stopping the loan because you are moving or paying it off in the next month it almost certainly does not make sense to refinance. Each breakeven point is different - for this loan, it would be about 1.5 years.

I fully admit refinancing can be a painful experience - both figuratively because of the hassle and literally because you have to sign so many papers but my guess is there are many out there who could still benefit. Please give me a call if you are interested. I am not a lender but am happy to provide contact information for a lender and talk with you to see if it makes sense to pursue.


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