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Over the last few years, homeowners have enthusiastically contributed to a refinancing boom as mortgage rates hovered at historical lows. Mortgage refis peaked in May this year but have since dropped 64% as interest rates started creeping upward.
Does that mean your family can no longer benefit from a refinance? Not necessarily. A lot depends on your situation—your rate, the term on your current loan, even your reasons for refinancing are a consideration.
Break-Even Analysis Is the Key
If you’re focused on the bottom line, a break-even analysis will tell you if a refinance makes sense for you. Take a look at the hypothetical Smith family to see how it works:
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The Smiths bought their home in 2005 for that year’s average price of $289,000. Since they were average, they got a 30-year mortgage with that year’s average rate of 6%. Today, after eight years of payments, they still owe more than $250,000.
Now the Smiths are intense about paying off their home. They know they can do that faster with a 15-year mortgage and a lower interest rate. So they refinance the balance on a 15-year term with the current average 3.35% interest rate.
Their payment will actually go up by $66 a month, and the estimated closing costs on the refinance are about $4,600. The Smiths won’t be able to break even with a lower payment, but they will with their savings on interest.
If the Smiths had stuck with their 30-year mortgage, they would have paid nearly $335,000 in interest. With the refinance, they will pay $68,000 in interest over the 15-year term. The reduced interest means they will break even on their closing costs in nine months.
And the Answer Is . . .
So, for the Smiths, a refinance is a no-brainer. They save nearly $130,000 in interest, pay off their home seven years sooner, and, since their payment is almost the same, they should be able to find extra money in the budget to pay off the mortgage even faster.
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Your situation may not be as clear-cut. Perhaps you already have a low interest rate, or maybe you’re not sure if you will stay in your home long enough to recoup your closing costs. Go ahead and do your own break-even analysis so you can base your decision to refinance or not based on the facts—not just a gut feeling.
An Alternative to Refinancing
Instead of refinancing, many people choose to sell their expensive homes. That may sound drastic at first, but if your mortgage payment is keeping you from making progress on paying off debt or investing for the future, consider how much more you could do with a smaller payment and a more modest home.
If you think selling is the right move for you, an experienced real estate agent can give you great advice about preparing your home for sale. They can also teach you how to price it appropriately and what you can expect from your local real estate market.
Find a qualified, trustworthy real estate agent who’s earned Dave’s recommendation through his nationwide network of Endorsed Local Providers (ELPs). Find your ELP today.