When should you Refinance?

Deciding when to refinance your mortgage is a crucial financial decision, and I’m here to provide some guidance. As interest rates are expected to potentially come down in the coming months and years, understanding the right time to refinance can make a significant impact on your financial well-being.

**The 1% Rule and the 36-Month Benchmark**

A widely recognized rule of thumb in the mortgage industry suggests that considering a refinance is prudent when interest rates are 1% or lower than your current rate. There’s an additional criterion – recouping your refinance costs within 36 months, or 3 years. Let’s break down the numbers to see how this rule holds up. A necessary assumption is a refinance cost of $3,000 (which may vary based on specific circumstances), we’ll use this as a benchmark for comparison.

**Scenario 1: Lower Loan Amount – $100,000**

Suppose your current interest rate is 7.5%, resulting in a monthly payment of $699.21. If you refinance at 6.5%, your new monthly payment becomes $632.07, a difference of $67.14. To recoup the $3,000 refinance cost, it would take 44.68 months or 3.7 years, exceeding the 36-month benchmark. However, if we explore a 2% drop, the recoup period shortens to 22.82 months or 1.9 years, meeting both criteria.

**Scenario 2: Higher Loan Amount – $500,000**

Now, let’s consider a higher loan amount at 7.5%, resulting in a monthly payment of $3,496.07. At a 6.5% rate, the new payment is $3,160.34, with a difference of $335.73. The recoup period is 8.9 months or 0.74 years, indicating that a higher loan amount can make a refinance more enticing with a lower drop in interest rates.

**Understanding Your Specific Situation**

While the 1% and 36-month rules provide a good starting point, your unique circumstances may influence the decision to refinance. I recommend using the 1% rule as a trigger to consult your trusted mortgage broker, who can provide tailored advice based on your financial situation.

**Important Considerations**

Two critical points to keep in mind:

• **Term Extension:** Refinancing may potentially extend your mortgage term. Be cautious not to significantly extend the term of your mortgage, as it can be costly. Opt for a new loan term equal to or less than the remaining term of your current loan to save money.
• **Fee Structure:** Be wary of lenders charging fees to meet the 1% lower rule. Ensure that the interest rate reduction is “organic” and not achieved by paying additional points or origination fees.

If you have questions about refinancing, feel free to DM me for more information. I’m here to assist you in making informed decisions about your mortgage. Thank you!