November 14, 2016

To refinance or not to refinance?

The era of low rates is supposedly coming to an end but does this mean it’s time to refinance?

In order to give you my best answer we need to make an assumption – that being that the only reason to refinance is to lower your rate and payment NOT to cash out equity – that changes everything as this is a personal financial decision.

Conventional wisdom says that if you can save on your monthly payment by a “meaningful amount” then the refinance may be worth it – the difference in rate required to make the savings?  Some recommend as little as ½% on rate – others suggest a full 1% rate difference as the determining threshold.  Either way the basic math says that if you refinance, the payment savings must be offset against the costs of obtaining the loan.  However, because I’m a nerd, I want to delve a little deeper….

My assumption is that you borrowed $417,000 on your house about 2½ years ago at a 4½% interest rate.  Your remaining mortgage balance after 30 payments of $2,113 is $399,600.  Compare refinancing the balance at a rate of 3.5% or 4% (lowering your payment by $319 or $205) and assume your closing costs for this new loan are $5,000.

A simple way to analyze the benefit or value of the refinance is to say that after 16 payments (at 3.5%) or 25 payments (at 4%) have been made you break even (it took 16 or 25 lower payments to get back the $5,000 you already spent).  But this may be too simple – consider this, assuming you refinanced the remaining 27½ years on your loan into another 30 year term your equity/wealth position has been modified.


As my “simple” chart shows, there’s more to this story.  By looking at the situation after 5 years have passed, the refinance at 4% saved you $1,154 in payment BUT you actually owe $1,338 MORE on your house than you would have done by doing nothing at all.   Similarly the refinance at 3.5% saved you $4,555 in payment and you owe $214 LESS on your house than doing nothing at all.

While it seems clear from this overview analysis that a 1% rate difference is what you need to see to make a refinance worthwhile – consider several other factors such as:

  • how long have you already had your home loan?
  • how much longer do you plan to stay in the same home?
  • do you plan to make more than the minimum payment at any time?
  • Are you OK adding on to the length of your mortgage?

I pride myself on having a decent working knowledge of mortgage loans so that I can assist my clients with their questions, but selling real estate is my business and I’m always ready to assist you with your Franklin Real estate needs – buying or selling I have over 16 years experience and a group of clients who consistently feel like I treated them as I would family.  I can always be reached at 615 579-7909 via Facebook and of course Email.

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Posted by Simon

Simon Hartland has been selling real estate in Franklin and surrounds since 2000. Don't let his silly accent fool you into thinking he's not more local than you are!

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