I once heard a good rule of thumb to help homeowners recognize a good deal on refinancing when it happens along. IIRC, it has to be one full percentage point less than your current mortgage rate to be worthwhile? And, how do points and closing costs factor into this? (Assume the old and new rates are fixed.)
I would start by determining the difference in the monthly payment and see how many months it would take to offset the closing costs, after which you’ll be money ahead. I just opened a new bank account today and the guy was telling me they refi for only about $250; there are apparently some good deals to be had by checking around.
I get a no-closing-cost refinance so basically anytime the percentage rate drops a half point it’s worth my time to do it. I get the term the same length as it would have been, or sometimes shorten the term.
The ‘one point’ drop in rates is meaningless. That had teeth when rates were 10% and closing costs via a few mortgage companies/banks were pretty consistent. A one-point drop was a 10% drop.
With rates below 5%, a half-point drop is more than a 10% drop, and you can shop around for no-point options, variations in closing costs, etc.
You have to do math: If you invest 3600 bucks to close (all fees, points, etc) and you wind up with a monthly payment that is 300 less, your return on your investment (ROI) is one year. Can you part with 3600 bucks to save money every year after this one?
If you have to part with 4800 dollars to save 100 month, maybe that isn’t wise considering you have to wait until year five to come out ahead.
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We’ve refinanced when the difference is less than a point, for sure! Our current mortgage is 4.25%, we started at 6 3/8% when we bought, nearly 9 years back. Less than a year later, we refinanced at 5.75%; a couple years ago we refinanced at 5.125%, then last fall to 4.25%. In hindsight, the one to 5.125% was not worth it because rates dropped even further, but we had no way of knowing that.
To my mind, the gold standard would be this: if you calculate your new payment, assuming you’ll prepay enough to have it paid off at the same time as the old loan (e.g. if you’re 5 years into a 30 year loan, your new 30 year loan would be X dollars, but add some money to have it paid off 5 years earlier)… and you’re still saving money over your previous payment… AND the difference is enough to make the closing costs worthwhile.
Say your payment is 2,000 a month and you’re 5 years into the loan. Rates have dropped enough that on a new 30 year loan, your new payment would be 1700 a month. If you paid an extra 150 a month, you’d be done in 25 years (or, the same time as the old loan would have matured). So your “real” savings every month is 150 a month.
Say it costs 5,000 to refinance. 5,000 divided by 150 is about 33 months. Will you most likely be living in the house 33 months from now? If the answer is yes, then to my mind, refinancing is definitely a good bet. If you can discipline yourself to keep paying the current payment, then it’s an even better thing because you’ll be done even earlier.
Of course, even without doing the prepayment, the refinance might be a good idea - in the long term, you would be paying more, but in the short term, the cash flow improvement might be substantial (2000 vs 1700 dollars for example) and therefore worth it.
But in that scenario, bear in mind that 2000512 (what you’ve paid to date) + 17003012 (what you’ll pay on the new 30 year mortgage) is probably more than 20003012. That’s 732,000 (not prepaying) vs 720,000 (sticking with the current mortgage); if you prepay the 150 a month, it’s 675,000 total.