Lots of people should take advantage of our still, record-low rates by refinancing. However, there are many things to consider before refinancing! Like this article points out, always keep your repayment term shorter than what you currently have left to pay off. What if you plan to move, is refinancing worth it? Well, that all depends. Refinancing, just like closing an original mortgage, has its costs. Ultimately, if you are going to stay in the home long enough to recoup those costs is key to determining whether refinancing on the way out is a good idea. The answer is always in the numbers.
Your time frame on selling your home is key to determining whether to refinance
By Ilyce Glink and Samuel J. Tamkin
We are paying 4.8 percent on a 20-year fixed mortgage. We owe $109,000 and are six years into the loan. We plan to sell a year from now. If we weren’t going to sell, I know I could do better on a mortgage rate. Does it make sense to refinance now?
Although you could swap your 20-year loan for a 15-year loan for a lower interest rate, you only have 14 years left on the mortgage. So you’d never want to get a loan with a longer term than what you already have left. You’d have to go for a 10-year loan, which should carry a lower interest rate than the current 20-year mortgage you have — but might be about the same as a 15-year mortgage.
In fact, during the week of July 4, 10-year mortgages were priced higher than 15-year mortgages. In looking at mortgage interest rates, the 15-year mortgages were priced at 2.70 percent, which is extremely low. Conversely, 10-year mortgages were priced higher, at 2.79 percent.
(That might seem counterintuitive, since shorter loan terms typically carry a lower interest rate, but is an odd occurrence due to worldwide market nuttiness, including Brexit.)
So let’s do the numbers. You didn’t tell us how much you’re paying right now or how much your original loan amount was for. But if you refinanced $109,000 at 2.7 percent for 10 years, you’d pay $1,037.49 each month (for principal and interest, not including taxes and insurance). You’d only pay $15,498 in interest over the entire life of the loan!
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If you were going to stay for even three years, refinancing this loan might make sense. But if you’re going to sell your home in a year, refinancing probably doesn’t make financial sense. It will likely cost you something to refinance, unless you do a truly no-cost refinance — and even then you might pay out of pocket for an appraisal or maybe a loan application fee. (If you get a no-cost refinance, then you will pay a higher interest rate.)
If you pay even one percent on a $109,000 refinance, that will cost $1,000. If you save $150 per month, it’ll take about six months of “savings” to pay off the cost of the refinance. But it might take you two to four months to shop for a refinance, get all of the paperwork together, and then close on the loan. In short, it’s not worth it.
You should probably stick with your mortgage and then you can apply for a new loan when (and if) you buy your new house.
article originally appeared on WashingtonPost.com