When does re-financing a mortgage make sense?
I have a 3.99% mortgage, and have been in the house just more than 2 years. We expect to be here at least another 3 years, maybe longer? Given that we might be moving in the not-to-distant future, does it make sense to refinance? I understand rates are really good right now. Is there a good break-even calculator online somewhere?
Answers ( 2 )
To expand on something @masseydvt touched on, but which may not be completely obvious to someone with this question, one of the major things to take into account here is financing costs, which are fees on top of your actual mortgage payments to originate the loans. These can quite easily be high enough to negate a small drop in your interest rate, especially if you're planning on selling within a few years.
I used this calculator about 15-20 years ago and it's STILL awesome:
https://www.bankrate.com/calculators/mortgages/mortgage-refinance-break-even-calculator.aspx
The only thing that was non-intuitive was that you needed to click on the little "+" to the right of "New Mortgage" to be able to enter the numbers for the lower-interest mortgage option. The break-even point is usually 3-5 years (depending on, like 800 different things).
THe longer you've been in your home, the less sense it would make to do so (since there's not much left on the loan), and as you mention, if you plan to move soon, this might not make sense. There are, however, options for "no-cost refis" where you don't get a rate that's _quite_ as low, but -- as it says on the tin -- you pay nothing for the closing costs. You just sign the paperwork and start paying a lower monthly payment.
Another trick some folks do is to just continue paying their _old_ mortgage payment even after the new mortgage is started with a lower required payment. This leads to a much earlier payoff of the mortgage (I think that's a pretty good idea if you're nearing retirement).