Will a Refinance Now Make Sense For You?

We bought our current home in the beginning of 2018, home values have gone up and mortgage rates have gone down. We initially put 10% down on our purchase, bumping our rate up a little from what could have been had we put down 20% lowering the bank’s risk and our interest rate. Since then, home values have continued to rise and our balance has been payed down about $6,000.00 . We’re just at the crest of seeing comparable homes selling for 20% more than we owe on our current home.

By speaking with a few lenders (let me know if you need a good referral) I’m finding that for about $3,000.00 all in we can do a rate and term refinance and get our rate down to about 3.8%. However, we can also spend about another $3,900.00 or so and buy our rate down to 3.5%! This combined effort would chop off about $308.00/month from our housing expense forever and cost about $6,900.00 today.

However.. when you look at the $308.00/ Month we’ll be saving, remember you need to go earn that money and then pay tax on it, and then make that payment. A dollar saved is not a dollar earned, it’s a dollar saved is a dollar + your tax bracket earned. So, if we’re in a 22% tax bracket, $308.00×1.22=$375.76 saved every month in pre-tax dollars (we don’t need to go earn & pay taxes to make that payment).

Let’s multiply that by 12 & see how much we’ll save each year, and how long it’ll take to recoup the cost of a refinance. $375.76×12=$4,509.12 saved every year. Ok, so lets take $6,900.00 and divide it by $4,509.12=1.53 This means in 1.53 years we will have received all of our refinance-cost investment back, and as we plan to hold this home forever (whether we stay or move) the rest is all savings of $4509.12/year in after-tax dollars, or a 65.34% annual return on your dollars spent. That’s a pretty good return!

It may or may not make sense for you to refinance. A few things to consider would be:
1. When did I buy my home?
2. How much more equity is now in my home? (do not trust zillow, speak with a professional)
3. What % did I put down? If it’s less than 20% & comparable home values have risen, you may able to eliminate your mortgage insurance (which is no longer tax-deductable)
4. What is my current interest rate & what can it be today if I refinance?
5. How long do I plan to stay in my home & how much would I save every month if I do refinance?
6. If I’m planning to stay for awhile, does it make sense to buy my rate down even further? (points paid are tax-deductable)

I am no longer a lender, never was a tax professional, and I am not providing advice as either. That being said, my previous experience as a lender benefits me personally in this case, and can benefit you if you’re looking to buy or sell as well. If you need a referral to a good lender, please let me know! If you need to buy or sell now, please consider me on your short list of licensed Realtors to interview!

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