Million Dollar Question of 2020. Should you refinance your home?
The answer is probably, but with a few notable exceptions.
If you own a home, your mortgage is certainly your biggest expense and liability. I owned 8 houses, which has given me a lot of mortgage experience. So take my expert advice:
Your mortgage payments really add up!
But you know what else I’ve learned? It’s really easy to pay less in mortgage interest. When you factor in how expensive a house is, reducing your interest even a tad is a pretty lucrative way to save money.
And no, you’ve heard me say this before, I don’t recommend paying the mortgage off, just pay less interest by refinancing. It’s much easier and more effective.
So today I will walk you through
- My own recent example
- How refinancing works and why you should do it
- The dark side of refinancing
- How often to do it, when to do it and when NOT to do it
- My 3-step process of refinancing your mortgage AND
- My shortlist of lenders that will maximize your savings and minimize wasted time
Just refinanced my home! It’s grrreat!
Let’s take a look at MY own numbers (but not my life).
The 5-year term on my mortgage just ended and my interest was about to rise to 3.15%. It’s still a historically low number but it was more than I was used to paying so I was not happy.
Suddenly, I got extremely motivated to look for a new lender and find a better rate. After having people bid on my mortgage for a while I ended up with a 2.6% rate with no upfront costs. I was happy again.
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My mortgage principal at the time was $480,000 so by investing an hour of my time for some research, I saved:
- $59 Bi-weekly
- $12,100 over my new 5-year term
- $31,500 by lowering my rate 0.55% over 20 years (calculator link)
But! I only saved 0.55%. You might do even better than I did! The majority of Americans can save A LOT of money by going through this exercise. Heck, 10% of you could save over $100,000! WOW!!
Okay, so let’s look at a few basics before jumping in:
How mortgage refinancing works:
Mr. FireEscape over here makes it sound like a rosy walk in the park, but really it’s not as simple as that because:
1 – The way you get a new mortgage is by literally having someone pay off your current mortgage in cash to help you get the new one.
That means: There’s a lot of money moving around.
2 – Houses are complicated. There are piles of financial tests, big and small (learn about them here), against you and your home that have to happen before a new bank decides to take you on.
Once that paperwork is out of the way, then you have a new mortgage! Easy!
Why refinance:
Financial experts can give you a list of reasons to refinance, but it really comes down to one. Can you save money?
If rates are good or your financial situation has changed, you’ll most likely save some money by refinancing. If you have a huge mortgage, even a slight reduction in interest will make a significant difference.
Here are three simple cases that can help you reduce your interest rate:
- If the rates are great all of a sudden. (Such as during a recession.)
- You had horrible credit when you first bought your home, but now you’re “an esteemed homeowner” and can ask for something better.
- You’re currently paying Private Mortgage Insurance (PMI) and can manage to remove it on a new loan. (You can also try to ask your current lender to remove it if you’ve paid off over 20% of your principal.)
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The dark side of mortgage refinancing
Before we get too excited, I want to point something out. Refinancing your home isn’t always a home run.
Yep. unlike refinancing your student loans, messing with your mortgage has some downsides.
Namely, thousands of dollars in fees.
We’re talking lawyers, appraisers, surveys, not to mention just plain old title insurance. Usually they run about 2% of the value of your house, but they can vary a lot, and you really won’t know until you start getting quotes.
Bummer.
Based on this Calculator:
Sidebar about zero-fee mortgages:
As a whole, I don’t recommend these. The rates are way worse, the prepayment penalties are horrible, and if you’re not going to save any money with a normal refinance, I wouldn’t bother with these either.
When should you refinance your home?
You should do it if you can save money. As you will soon see, it really takes very little effort to get the ball moving and see the results. Then you shuffle papers around for a few weeks and wait a few more before you start getting that extra money in your pocket.
It’s so little effort the only answer to when should you refinance your mortgage is now…if you can save money.
It doesn’t matter if your fish just died or you are busy at work. Look at it now.
Start that ball rolling. See the huge wad of cash coming your way, then you will be so motivated you’ll find the time.
Alternatively, if you are on a 7/1 ARM or something similar, take a look every time your term ends!
When not to refinance your home loan?
It comes down to this. If the fees are higher than the total you’ll save, then there’s no point.
A typical American with a $250,000 mortgage can save over $84,500 over 30 years (20% down). That’s pretty sweet, but it might not apply to you if:
1 – You might move soon.
It takes a few years to make back the fees in interest savings, so if you move too soon you just did all that for nothing.
2 – Your mortgage is almost paid off.
Towards the end of your mortgage, (think – the last five years) your payments are more principal and less interest meaning your savings won’t justify the fees (which are based on your overall home value.)
3 – You can’t get enough of a rate reduction.
Essentially, if it will take so long for the fees to break even, you should reconsider. (Who knows, maybe you’ll move before then or the rates might drop even more.) And by the way, don’t forget to factor in any prepayment penalties into your calculations.
How to calculate your breakeven:
- Calculate your monthly savings. (Get a quote or use a mortgage calculator.)
- Determine the fees. (Get a quote or do your own research.)
- Divide the fees by your monthly savings to find how long it will take to pay them off.
- Example:
$235/mo savings. $2,500 fees. $2,500/$235 = 10.6 months- (Well… It’s actually a bit more complicated because interest and some fees are tax deductible which makes the math messy, and also some fees like insurance can get added to your payments… so use this calculator if you are picky.)
How often should you refinance your home?
Every time the available rates go below what you are paying you should look into it. That’s how often you should refinance your home in your head.
The calculation takes a few minutes (I should know I did 1M permutations for this article). If you keep running the numbers and refinancing when the numbers look good you will eventually end up with an amazing rate that bears no comparison.
So you ran the numbers but still don’t know how often to refinance your home? Only do it when the payout is <5 years or over $10,000. If you refinancing multiple-times when the payout will take many years, you will not actually realize those savings due to the fees stacking up.
Also, who knows if you are going to still be there 10 years from now. Life moves quickly, I don’t want a mortgage refinance to be a factor in determining where I live.
3-step process for refinancing your mortgage in 15 minutes:
1 – Decide what type of loan you want (1 minute)
Decide on the length of term; variable vs. fixed; payment flexibility; etc.
Mr. FireEscape’s 2020 recommendation:
If you can stomach the uncertainty, I’d recommend a variable rate (read as 7/1 ARM). Statistically, variable rates are lower. Banks tend to know what they are doing when they decide on the 30-year rate numbers.
I also like having unlimited prepayment privileges in case I want to refinance again.
In terms of term-length, minimizing monthly payments is great so that I have more flexibility of how I invest my money, so I’d start with a 30-year term and get the lender to match your remaining loan length since you are refinancing. (30 years is already forever. Don’t make it even longer.)
2 – Boost your credit quickly with 2 hacks (10 minutes)
Do what you gotta do. Even if it means beg, borrow, or steal a cosigner. No lender’s going to swoon over you until you get your credit in check.
Mr. FireEscape’s 2020 recommendation:
Pay off your credit cards (those are a red flag on your credit report) and ask someone with better credit than you (maybe your parents???) to consign. It costs them nothing and saves you tens of thousands over the years if you have bad credit.
3 – Get some quotes! (4 minutes)
Loan applications through modern companies are really fast, especially if you use my list.
Here’s what I recommend for the minimum time commitment and maximum savings
Mr. FireEscape 2020 recommendation: Use my short and sweet list for better rates.
Recommended Mortgage Lenders
Recommendation #1 – SoFi (with no origination fees)
I recommend them for two reasons:
- No prepayment fees
- No origination fees
They have other perks, but these are the ones that got me.
As a note, you have to have good credit and a good job to qualify with them, but I have faith in you. I know my readers are awesome like that.
Recommendation #2 – Credible
If you don’t qualify for SoFi, you can still get something from Credible.
Just type in your details and they’ll shop around to a huge number of lenders.
So. Easy.
What’s not on the list?
If you’re wondering why I’m not recommending CommonBond like I did in my Student Loans refinancing article – it’s because they don’t offer mortgages. I would likely advocate for it if they did.
TL;DR – Refinance your home!
- Mortgage refinancing can save most Americans A BIG PILE of money (especially in 2020 as the rates drop.)
- BUT it also comes with some pretty hefty fees
- As a start, check out my shortlist of mortgage lenders to see what you could save and what’s your breakeven point
Do you have any success (or horror) stories about refinancing? Who did you use? Why did you switch? Anything you wish you’d known first? I’d love to know! Just leave me a comment.
