Refinance sounds like something your dad would brag about and let you know how much money he was saving by refinancing his house -- at least that's why my dad told me this past summer. He's 65, and just refinanced to a 20 year loan. So he'll still have a mortgage in his 80's.
Do you own your home? If so, you've joined the 64% of people in America that do own that paint, those windows, and that ugly smelly bathroom that the kids fight over NOT to use. We bought our first house when we were 26. It was 2010, I just graduated college, and got a "real job". With a 401(k), and salary kinda real job. So to go along with my freshly college graduated mindset, we needed a house. So we found a lovely 1958 multilevel dated gem, along with a very dead tree and overgrown rose garden in the front yard. Basically heaven. On signing day, I was so sick of looking at papers, and I didn't understand any of them anyways.
Fast forward to 2015. Our kitchen was falling apart. It was semi updated in the 90's, but definitely needed a reno. The oven was a smidge larger than an easy bake oven, only two burners worked on the stove, and many of the drawers were broken.
So, how are we going to afford that? I had since quit my "real job", and was pregnant with my second. Mortgage interest rates were lower than they were in 2010, and my husband wanted a lower monthly payment. Then I found out we could get extra cash back with a refinance? What? I can have a real oven, not my easy-bake-oven? I was sold. My husband was not keen on the idea of cash back - but I talked him into it, and for our situation it paid off. See?
So to refinance, it is taking out a new loan to pay off another. We owed $145,000 on that house in 2015. We took out a loan for $15,000 to cover costs of kitchen reno and other house repairs. So that between the $15,000 and ~$5,000 in closing costs, out new mortgage was $165,000 but with the same payment since the interest rates were lower.
By 2018 we found ourselves living in LA, and we didn't like having that house as a rental so we sold it. Yes, we sold that house for a $200,000 profit.
The market is no longer a flipping market like it was back then, but it definitely could be time for you to refinance for a better rate (the rates are ridiculously low right now). See the scenario below to see other awesome things that can happen with a refinance.
Are you Ready to You Refinance (Refi) Your Mortgage?
- Do you have at least 15 years left on your mortgage?
- Is your mortgage interest rate over 3.50% on a fixed rate loan?
- Are you planning on staying in your house for at least 3-5 years?
- Do you have a credit score at or above 700?
- Is your house at or below market value? See this (future) post before deciding this question.
If you said yes to ALL of these above, keep reading. If no, keep working hard to get there!
Let me give you an example...
I realize everyone will have different taxes and insurance numbers depending on their state/city they live in, but this is just a scenario to see what it could be.
- Lets say my original loan is:
- $250,000
- 30 year fixed mortgage
- 3.85%
- $170,000 left to pay off in 17 years
- My current mortgage payment: $1472
- Principle: $622
- Interest: $550
- Escrow: $300 (Insurance: $826/year Taxes: $2750/year)
The best option, is to refinance to a 15 year loan at 2.5%, is what most people will say. I think it depends. Get this - the 15 year mortgage is the same original payment as above, but kick off TWO WHOLE YEARS without paying anything additional!!!!!!! This is with the closing costs and the new sales taxes added in too.
So, what about the 30 year mortgage? Alright here's the breakdown for that:
- Refi my loan:
- $175,843 ($170,000 + $5000 closing costs + .5% new sales tax)
- 30 year fixed mortgage
- 3.0%
- My new mortgage payment: $1039
- Principle: $301
- Interest: $439
- Escrow: $300 (Insurance: $826/year Taxes: $2750/year)
The 30 year scenario is a savings of $433 per month! But just remember, this tacks on a good 'ole 13 years to your mortgage.
So here's the TRUTH with this scenario (and close to what it could be for you):
- You will be debt-free in 15 years with no change to your current mortgage payment with the 15 year mortgage.
- You will have extra cash in your pocket every month with the 30 year, but have 13 years added to your loan.
In our current situation, we decided to buy our house with the 30 year option (we are in our mid 30's - second house we've bought). We are saving the extra cash for a down payment on a rental property = more cash. Unless you have definite plans to invest this extra cash, or grow it somehow, I highly suggest going the 15 year route to avoid the extra 13 years of loans. The faster you can get to being debt free, the faster you will have the entire mortgage payment in your pocket. This choice depends on the situation, and the person/people. In the mean time I'll be thanking the Federal Reserve for these low rates!
Are you ready to see what a refi can do for you? Check out this
Refinancing Calculator to see if it makes financial sense to refinance your loan. I'd love to help you decide if it is time to Refinance! Contact me here or on my
insta
**This was written December 2020, when refinance (refi) rates for a fixed mortgage are very low (around 3%). If you are reading this at a different time, some of the advice may no longer apply.**
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