Today, I wanted to put on paper and provide details to the plan I have to re-finance my mortgage on my house! This is not a 100% certain action that I am taking, but the mortgage rate market is dropping low enough for me to look into, run the analysis on the numbers and potentially re-finance the mortgage.
My Current Mortgage Balance, Maturity Time and Interest Rate
I have currently lived in my house for 8 years, how crazy is that?! Further, I have made plenty of extra payments to the mortgage over my time here (not too many, and truly 0 extra in the last 3+ years), which has reduced my time to maturity. When I purchased my house in the fall of 2011, I received the lowest rate possible, at that time, which was 4.375%.
Currently, my mortgage balance (as our house is small, with an “ok” plot of land) sits at $70,251. Yes, we can easily pay that off in 12-24 months time if we were aggressive/crazy enough, but choose to not do so, in favor of investing into dividend stocks. Tagging along with my extra payments above, all calculators (my own and external) show that we only have 19.5 years left to the mortgage.
See – Interest Rate Cuts, Your Investment Portfolio & Your Mortgage
Obviously, I do not want to go any longer than 20 years if I re-finance. Further, re-financing my 19.5 year into a 20 year “extends” my maturity slightly. However, with cost savings in one month alone, I could reduce that to being back on track.
Lastly, the reason I want to re-finance is the mortgage rate market has taken a nose-dive since the Fed froze rates and there is high probability of a rate-cut this month, despite there being a strong jobs report. Here is the chart of the mortgage rate this year alone:
Mortgage Interest Rate Needed
Now, I currently am at 4.375% and am “only” paying ~$447 in principal and interest per month. Lucky, no doubt, and I did buy just shortly after the recession/before the housing market had a chance to change in pricing. Therefore, it is hard to find the right rate to make sure that it ends up being worth it.
The desired rate is in the 3.30-3.35% range as my mortgage re-finance rate. Further, I would prefer to do the 20 year. What is funny, is my Credit Union that I work at, our 20 year mortgage rate is currently at 3.475% and we are inching closer and closer.
To keep the calculations rounded, let’s assume an $1,750 closing cost on this and that is ADDED to my loan (See also – my previous taken unsecured bad credit loans) making the balance $72,000 in the end. Further, for the rest of this article, let’s assume 3.35% is used.
See – Pay Down the Mortgage or Invest, That is the Question
Mortgage Re-Finance Break-Even Point
At 3.35% with a 20 year mortgage life, my payment would drop to $412 per month, principal and interest. Now, the big factor is the $1,750 in closing costs on the re-finance. The fun part is calculating how long to hit what we call the “break even” point. The calculation is cost divided by recurring savings and this will output how long to re-coup that cost.
In my case, $1,750 is my cost. The savings per month would be ~$35.00 on the mortgage payment. Therefore, you simply take the $1,750 and divide that by $35. Below, from my calculator, you will see that it will take 50 payments, or 50 months, until I hit my break-even point. This is a little over 4 years.
Other Re-Finance Things to Consider
There are other mortgage re-finance items to consider, prior to going into doing this. Here is everything on my mind, as I step through (potentially) the process:
- Know your credit score – Knowing your credit score is the factor that will play into the interest rate you will receive! Therefore, I am using my assumption that I am in the highest credit rating bracket possible. However, if you are not, you have to be cognizant of what rates fall into the tier that you are in, from a credit score stand point.
- Closing costs – Similar to my example above, closing costs are crucial! This is what will depict your break-even point or payback period. I assumed a 2.50% closing cost for my loan, but it could vary 0.50-1.00, in either direction.
- Home Equity – I wouldn’t be re-financing if I didn’t have sufficient home equity, i.e. amount of loan remaining to the value of your house. I know I have at least 35-40% of home equity, therefore, no concern for me. However, this is a point to keep in mind, as you go through the re-finance route.
I know there are other areas to think about when going through the process, but these were the big 3 items on my mind, outside of everything else above.
Conclusion
This is my goal. I would LOVE to accomplish a re-finance 10 years into my mortgage. I never imagined I would be in a position to perform this, as my rate was low, with a low balance and I had already applied extra mortgage payments in the earlier years. Those extra payments, surprisingly, have snowballed into saving over 2.5 years off the mortgage already. Therefore, even if you don’t re-finance, the extra payment being made here or there, goes a LONG way.
I am not sure how long a typical re-finance takes, but I am looking forward to testing out these waters (hopefully). The better than expected jobs report may have delayed the rate cut, as the probability is 95% for no-rate cut in July, but still there is an aim for lower rates over the next 6 months. You better believe I am glued to this and will be quick to make a move on any sign/display of that 3.30-3.35% 20 year rate.
In the end, it’s all about saving money. If the rate was 3.35% vs. where I am at now (and not considering anymore extra payments), I would save $6,600 in interest over the life of the loan WITH a lower payment. I love it.
What are your thoughts? Are you re-financing your mortgage? Are you in the market looking to buy, now that rates have decreased this year? Would love to hear your feedback, your experience doing a re-finance and anything else that would be valuable! Thank you for stopping by and talk soon!
-Lanny