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Welcome back, fellow parent

Last week, a fellow homeowner asked me if now is a good time to refinance their home.

It’s a loaded question and we’re meeting to discuss his financial situation in more detail, but the question inspired today’s newsletter in case others were thinking about refinancing.

Current Interest Rate Environment

Ugh, inflation.

I know this topic is getting a bit worn out, but it directly impacts refinance interest rates so I’m bringing it back up.

As of mid-July 2024, the average rate for a 30-year fixed-rate mortgage is approximately 6.89%, while 15-year fixed-rate mortgages are around 6.17%​.

While these are still high, they’re lower than their peaks last year, which hovered around 8%. Still not great though when compared to ~4%, which is where rates were for the better part of a decade.

Really not great if you compare them to the historic lows during the pandemic. My wife and I are extremely lucky, we locked in a 2.75% refinance with a 11 month payback period (more on payback periods later). I realize this may never happen again and so we won’t touch our mortgage terms if we can avoid it.

To be honest, no one really knows what’s going to happen in the near-mid term with interest rates. Predictions for the remainder of 2024 suggest a gradual decline, with forecasts for the third quarter ranging from 6.77% to 6.9%​.

Looking ahead to 2025, experts are cautiously optimistic.

Many predict rates could dip further if inflation continues to cool and the Federal Reserve implements more rate cuts. However, several factors could derail these forecasts. Unexpected spikes in inflation, geopolitical tensions, or economic disruptions could push rates higher again.

Why Bother Refinancing Now?

Despite the rates still being high, you can make a case for a refinance depending on your financial situation.

With a refinance, you may be able to lower your monthly payment, change your loan terms (going from 30-year to a 15-year), or convert to an adjustable-rate mortgage (ARM).

If you locked in a 8% interest rate on a $300,000 mortgage and refinance to a 6.89% rate, over 15 years, you could save approximately $46,000 in interest. Over 30 years, the savings could balloon to nearly $130,000.

There are pros and cons with adjustable-rate mortgages. Do your research and be mindful of this type of loan. They can lead to some bad financial situations down the road.

If you need cash, you can tap into your home’s equity with a cash-out refinance. The cash flow could help you pay down high-interest debt, pay off a major expense (ex. home improvements, medical bills), or even invest in yourself (ex. purchase a business, pay for education).

The Break-Even Formula

To determine if refinancing is worth it, use the below formula to calculate the break-even point between costs and the monthly savings you’ll get from the refinance. On average, closing costs can cost between 2-5% of the loan amount.

For instance, with closing costs of $5,000 and monthly savings of $200:

If you plan to stay in your home longer than the break-even period, refinancing could be beneficial.

When I refinanced during the pandemic, the payback period was only 11 months, so it was a no brainer. Our timing was doubly fortunate. Interest rates were at a historic low (#1), which caused demand to skyrocket. With higher demand, mortgage companies were offering dirt-cheap refinances to attract customers (#2).

In today’s market, there is less demand and its riskier for companies to take on loans, meaning closing costs may be higher. Plus inflation has led to rising costs across the board.

Do you research and use the above formula to determine the value of refinancing.

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Shop Around to Find the Best Rate

Shopping around for mortgage refinance rates can save you thousands of dollars over the life of your loan.

I’d recommend starting with your existing mortgage lender. They already have your information on file so they may be able to refinance more quickly and simply.

If their rates aren’t competitive, request quotes from several lenders (at least 3). Each lender will have different rates, terms, and fees, so comparing them side-by-side will help you find the best deal.

Each lender will offer you a different offer to consider so it’s important to compare them together apples-to-apples.

Here’s an example for a $300,000 refinance:

• Lender A: 6.75% interest rate, $4,000 in closing costs

• Lender B: 6.80% interest rate, $3,500 in closing costs

• Lender C: 6.70% interest rate, $4,500 in closing costs

Even a small difference in interest rates can lead to significant savings.

In the above example, although Lender B has the lowest closing costs, Lender C offers the lowest interest rate. Over a 30-year term, the lower interest rate could save you more money than the difference in closing costs.

Pro tip: Instead of going with a new lender, leverage the better rate and negotiate with your current lender. I’ve done this and it’s a great way to get a better rate with your preferred lender.

A Final Thought

Deciding whether to refinance now or wait depends on your individual circumstances and future rate expectations.

While rates are high, they are expected to decline gradually.

Evaluate the pros and cons, consider potential risks, and use the refinancing formula to make an informed decision. And remember, always shop around for the best rates and terms to suit your unique financial situation.

For personalized advice, consult a mortgage advisor.

Feedback is a Gift

Thanks again for reading - I hope the above was helpful in your financial journey.

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Talk soon,

The Dollar Dad

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