After much analysis, I came to an interesting conclusion recently when I was contemplating a refi. See, I had held off most of last year because we were considering moving. Now that that ship has sailed and we’re staying put, the focus naturally shifts to whether or not we should refinance.
I was lucky in that I had refinanced a few years ago when home loans were also going at record lows (I locked right after the Fed made one of their initial bailout announcements and Treasuries spiked sending yields down). So, with a 30-year 4.625% mortgage a couple years in, the option on the table now was whether I should refinance into a 15-year mortgage at 3.875% or thereabouts. What I found was actually shocking.
It Doesn’t Make Sense!
Even at 3.5% or lower, it just doesn’t make sense to refi my current mortgage. I have a spreadsheet that allows you to calculate future mortgage payoff dates and such based on pre-payments and what I found was that if I simply paid the closing costs I’d require for a refi into my current mortgage today (~$4,000) and then pre-paid the higher amount I’d pay monthly on a 15-year, the payoff date on my current mortgage is like 16 years! So, what this is saying is that I could go refi into a 15-year and lock myself into risker, higher payments and only save a year on my mortgage. Meanwhile, I could just do it myself under my current mortgage if I so chose, but retain the flexibility to drop back down to my current monthly payment should something happen like job loss or medical emergency.
The Conventional wisdom has historically been that “it makes sense” to refi at anything more than 1 point. I’m not sure this is true though. The lower your starting rate (like 4.625%), the tougher it is to justify a refi, especially when accounting for how far in you are and the present value of money.