Should You Refinance Your Mortgage?

As a recent homeowner myself, the question has constantly been dangling over my head every time I see mortgage rates move lower. 30-year mortgage rate has fallen off a cliff to as low as 3.15% in the aftermath of the virus outbreak as the Federal Reserve cut interest rates. However, there are hidden opportunity costs associated with refinancing and we need to consider all these factors in order to help us decide whether we are truly benefiting from refinancing. Help yourselves, not the banks.

The top item on the the list is also the most explicit factor: closing cost

On average, Americans need to set aside around 3-5% of their total borrowed amount to pay banks for their services. Now ask yourself this, what would you have done with that cash if not for refinancing? Would you invest it or would the money simply be sitting in a checking account? If you were to invest, what return are you honestly expecting per annum? More importantly, would the after tax return exceed the benefit you get from paying less interest after refinancing. Keep in mind, if you are itemizing on your tax return, your interest payments are generally tax deductible so their real costs is lower.

The other item to consider is mortgage prepayment

If you currently have a 30y mortgage but are fully capable of and intend to pay off within 5-years time frame, then the scenario becomes completely different since now the lower interest you get from refinancing isn't worth the same. Putting it in simple terms, since you intend to fully prepay your loan within 5 years, the benefit you get from refinancing at a lower rate only last you 5 years time as oppose to the full lifetime of the mortgage.

Lastly, opportunity costs

What would you have done otherwise if you weren't working with brokers on refinancing. If it consumes hours and hours of your time doing all the paperwork and going through the process, is it worthwhile. And that really comes down to how much you value your leisure time. Alternatively, you can quantify it by asking yourself if you were to spend those time working, how much would you have made. 

Once you have thought through all of these components, you may be better informed to make the best choice for yourselves and not your brokers.