To Refinance or Not Refinance

We spoke to Mike Hendrickson, Sr. Mortgage Consultant at U.S. Bank, to get his thoughts on refinancing your mortgage. Here's what he had to say:

There is a frenzy created by ads and mailers telling us NOW is the time to refinance! I am getting a lot of calls from clients asking about it. My goal with this note is to discuss the pros and cons of refinancing your mortgage. I always discuss these with each client and search for the tangible benefits that make it worthwhile (or not) for them.

Considerations: First of all, yes, rates are low, but are they low enough to benefit you? Here, there is a general rule of thumb: your new rate should be at least ¾ of a point lower than your current rate. I like to use the 1% rule as the minimum. So, if rates today are 3.5% and you have anything below 4.2% currently, then you might not want to move ahead. If you took out your mortgage from 2014 through mid-year 2018, you probably are not going to want to refinance. On the other hand, if you took out your mortgage in the last two-quarters of 2018 or the beginning of 2019, you might just be sitting at 4.5% or above and want to take a look at your refinancing options.

Options: Given the rule of thumb above, there are other attractive reasons to refinance anyway. Maybe you need to take cash out, maybe you want to switch to a 15-year mortgage, or maybe a refinance is the only way to eliminate your current PMI. In these cases, that rate differential does not matter as much as long as you are getting a better rate or term.

Action Plan: What’s the best way to cut through all the hype when looking at whether you should move ahead with a straight refinance? First, make sure you will recoup your closing costs in a short period of time (3 years or less) AND that you will be staying in your current home for 3 years or more. As a rule of thumb, in Florida, it will cost you 1.5% of the new mortgage to close. So, if you owe $500,000 you can expect to pay $7500.00 in costs – you can choose out-of-pocket or roll that into the loan. To calculate the $7500.00 payment, simply divide it by 36 and you get $208.33 per month. This represents the minimum you will need to save per month in order to have it make sense for you.

Please feel free to call me 7 days a week for a free, no-obligation mortgage review to see when and if you should refinance.

Please note this discussion in no way represents a rate quote but rather is designed to give you tools to understand what drives rates and how to spot trends. Your specific rate also depends on a number of factors like down payment, credit score, etc.