Time to Refinance? #illumedati


Hey everyone, it’s Finance Fridays again. Today is going to be a short post about “Time to Refinance?”

Time to Refinance?

Time to Refinance?

In case you guys don’t know, interest rates have continued to decrease the last few years. This has affected both student loan refinancing and home mortgage refinancing.

I don’t plan to refinance my student loans because they’re mostly below 4% anyways. Additionally, I plan to pay them off in the next few years anyways once the kids are both in public school (free!).

However, I did refinance my house a year or two ago for a pretty good rate (at the time). For those of who haven’t refinanced, you may want to look into it. The rates are even lower now, as of late I’ve seen 3.125% and 3.25% with a variable amount of points for a 30 year mortgage. (to qualified home owners of course)

That’s pretty low…

If the interest rates continue to go down, I may consider refinancing my house again if I could get like a rate close to 3% with minimal points or something to that effect. Of course, there is the issue of “resetting the clock” on the mortgage. However, as long as there is no penalty on paying off your mortgage early, that isn’t necessarily a problem.

If you want to, you could refinance and continue to make the same payment every month, even if your monthly payment went down. In that way, you wouldn’t feel any change at all and would pay off your mortgage a little early. That is most likely what I would do if I decided to refinance.

Should I do it now or wait?

There is no way to tell whether interest rates will go down or up. Any prediction is likely going to be wrong. The way I think about it is:

“At what rate will refinancing be worth it to me?”

The round number I’ve seen thrown around is a 0.50% decrease. I think there is a good reason for that. For example, if your current interest rate is 4% and you can refinance to 3.25% (0.75% decrease), then that’s probably a good idea. However, if your current rate is 3.75% you can refinance at 3.25% (0.50% decrease), then that’s kind of “right there” in terms of it being worth it or not.

Of course, you have to talk about “points” as well. This is money you’re paying to the lender in order to get the lower rate. So it may not be a better deal to get the “lower rate” if you have to pay more points up front. It’s not just the money you’re paying ahead of time, it’s the opportunity cost associated with that money as well. For this reason, in general, at least a 0.50% decrease is relatively safe assuming the lowest amount of points paid.

So then, which is better?

3.25% interest rate with 1.375% points or
3.125% interest rate with 2.125% points

I haven’t run the numbers on these, but I would imagine these end up being pretty similar in the long run. For those interested, those are the rates that Bank of Hawaii and 1st Hawaiian Bank currently advertise on their website for a 30 year fixed.

However, you may also want to take into account that if you plan to pay off the mortgage early anyways that the slightly higher interest rate with lower basis points may end up winning out. To be honest though, it probably isn’t huge difference overall.

Are you going to refinance?

Maybe.

To be honest, my rate is pretty good right now. However, it’s getting to the point where if the interest rates drop a little again that it may be too good to pass up. Like I said, as long as there isn’t a penalty for early payment, then I would just keep your mortgage payments the same as they are now. Then I would end up paying off the mortgage a little earlier. Ideally, that time would coincide with my complete retirement (after being part time).

We’ll see what happens.

TL;DR

Interest rates keep going down.

No one can predict what the “lowest rate” will be.

Consider refinancing your house or student loans (or both).

We’ll see what I end up doing.

Finance Fridays Sensei

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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