It seems like everyone I know is refinancing their mortgage, including me! Why? Because mortgage interest rates are at a HISTORICAL LOW! We are talking 30-year rates at 3% interest. Like, what?? I am going to give you some practical reasons and examples for why you should consider refinancing your mortgage.
NOTE: Before you read this blog, I encourage you to check out my post 4 Reasons to Care About Low Interest Rates. It explains some of the mechanics behind interest rates.
Why should you consider refinancing your mortgage? Because:
- You can save a LOT of money in interest
- You can increase your budget flexibility
Your current mortgage balance is $340,000.
You mortgage started at $350,000.
Your interest rate is 5%.
Your monthly payment is $1,879.
You got the 30-year mortgage in 2018 and now have about 28 years left.
PAUSE: Let’s say you kept the 5% interest rate for the next 28 years. What do you think your total interest paid over the life of the mortgage will be?
Answer: $326,395! That is $676,395 paid for a $350,000 loan. Gulp.
1. You Can Save A Lot of Money in Interest
You decide to refinance your $340,000 mortgage.
You qualify for a 3% interest rate.
You stay with a 30-year mortgage.
This decreases your monthly payment to $1,433, but you continue paying the original $1,879 anyways!
Before you refinanced, you’d already paid $34,501 in interest… cringeworthy, I know. However, you will only have $113,137 more of interest payments through the life of the new loan AND you pay it off 8 years faster.
That means you will have paid $178,757 LESS in interest because you refinanced!!!
So, I think it should be obvious how refinancing can save some people a lot of money.
NOTE: Refinancing does require closing costs. However, if you plan to stay in the home for a few years, it usually more than pays off. Ensure you have clarity on this topic from your mortgage broker. They’ll be able to give you an estimate of what these costs will be (and in some cases, they are able to have them rolled into your refinanced mortgage. Then you don’t have to pay them up front! It doesn’t hurt to ask, right?).
2. You Can Increase Your Budget Flexibility
Remember in the previous example how refinancing lowered the monthly payment from $1,879 to $1,433? Now, even though you don’t HAVE to pay $1,879, you would pay the mortgage off faster and pay less interest if you stick with your same monthly payment.
However, you do have the OPTION of paying $1,433.
That means if you ever lost your job or found yourself in a financial pinch, your monthly payment is now $446 less than it used to be. That can mean a lot when money is tight.
So, while I always recommend you make the larger payment, I do appreciate that refinancing can provide people with budget flexibility if needed.
The topic of refinancing and interest rates can get complex and number heavy. I tried to keep it simple with just explaining the concept using a basic example. Obviously, your personal situation could be much different!
And don’t feel like you have to rush this decision! The Fed insinuated that their interest rate could stay low for a while.