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!