Time to Refinance Your Home?

One silver lining amid recent events is that market interest rates have declined, resulting in lower mortgage rates. Mortgage rates are sensitive to the 10-year Treasury note, which had a yield of 1.53% as of Sept. 30, 2021, an increase over the near-record low 0.66% yield as of Sept. 30, 2020. While less opportune a time to consider refinancing than near the record-low yield, a home refinance may still be worth considering if you have not done so recently.

Even if you are at a seemingly attractive 4% interest rate, it may make sense for you to take advantage of today’s lower rates to refinance. This is particularly true if you believe that inflation and interest rates are likely to rise over time — not necessarily over the next year (or two or three), but it is a reasonable possibility that rates will be higher over the 15- to 30-year term of a mortgage. At this point, there may be upward pressure on the rates over time from the deficit spending we have seen recently to help the economy continue to recover from the COVID-19 pandemic.

One key question to consider is how long will you be in the property? This determines the amount of interest rate protection that you will need. As of Dec. 15, 2021, the published 15-year mortgage rate from a major national lender is 2.125% with a 0.831-point origination fee. The 30-year mortgage rate is currently 2.875% with just over 1/2 point.

How do you calculate the break-even point of a home refinance?

  • Determine your closing costs, excluding property taxes and insurance, which you would have to pay anyway. Your lender can give you these figures.
  • Calculate a new monthly principal and interest payment based on the remaining maturity of your old loan and compare it with your current principal and interest payment.
  • Divide the total closing costs by your annual principal and interest savings.
  • The result is the number of years it would take for you to break even, which may not be as long as you think. If this period is relatively short, and you intend to stay in the property for a while, then there’s really no reason not to refinance. It’s just a matter of going through some paperwork, most of which is done by the lender and your attorney.

If you have had a 30-year mortgage for some time, you may want to consider moving to a 15-year term. For example, say you have 20 years remaining on your existing 30-year mortgage. Your total payment will go up because of moving to the shorter payment schedule, but the lower interest rate will offset much of this increase, and you will save significant interest costs over the term of the loan.

If we can help analyze your situation if you should consider a home refinance, please give your advisor a call.

Bill Hansen, CFA
President, Chief Investment Officer

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