TODAY ON REASONED REFLECTIONS:

• To refinance or to not refinance;

• Personal finance articles 💰;

• Something I’ve learned since Reflection No. 3 🤓;

• Quote of the Reflection.

Reflection No. 4: When To Refinance a Mortgage

The Federal Reserve has hinted at upcoming rate cuts, which could mean lower mortgage rates soon. The rate cut news is excellent for anyone considering buying a home or refinancing. Even a slight drop in interest rates could lead to huge savings on monthly payments and overall borrowing costs. Mortgage rates usually follow suit when federal rates go down, sparking a potential surge in home purchases and motivating current homeowners to refinance for better terms. The question on the minds of current homeowners, though, is: when should I refinance? 

I - Issue: When does it make sense to refinance a mortgage?

R - Rule: Refinancing your mortgage when interest rates drop can save a lot of money over the life of the loan. It's generally recommended to refinance your mortgage if the new interest rate is at least 1% lower than your current rate.

A - Analysis: If you are thinking about refinancing your mortgage, it's important to carefully assess what kind of savings you'll see once you refinance to a lower rate. For instance, if you have a $300,000 mortgage with a 7% interest rate lasting 30 years, your interest payments alone would total around $419,000. However, by refinancing at a lower 6% interest rate, the total interest paid would decrease to approximately $347,000—saving you $72,000 over the life of the loan. Your monthly payment would go from $1,966 to $1,799.

You should keep a couple of things in mind when deciding whether to refinance your mortgage.

1. One factor to consider is that by refinancing into another 30-year loan, you restart the clock on the loan term even if you have already been paying your mortgage for several years. Refinancing resets the loan term to 30 years (or 20 or 15 years if you can make a mortgage with a shorter term work financially).

2. A primary factor when deciding to refinance is the loan costs associated with doing so. The loan costs—which might include, among other things, an appraisal fee, underwriter fees, and the lender’s cost to pull your credit history—might total around $2,000 (that's a guestimate, and you should check with your mortgage lender for accurate costs). You should assess the potential monthly savings to determine the break-even point. The example above saved about $197 per month, so the costs to refinance would be recovered in slightly over ten months ($2,000 in closing costs divided by the monthly interest savings of $197). Therefore, if you plan to stay in the home long-term, refinancing definitely becomes a prudent financial decision.

Refinancing also benefits individuals dealing with increased property taxes, often experienced with new builds. When you purchase a new build, the assessed property value is typically low during the first year or two, resulting in lower property taxes. However, property taxes rise significantly as the home's assessed value adjusts, leading to elevated homeownership expenses. Refinancing can help mitigate these tax increases by reducing the mortgage payment's interest portion. By lowering the interest rate and the monthly payment, you can effectively counteract the impact of rising property taxes and better manage the unavoidable expense of owning a home.

C - Conclusion: Refinancing to a lower interest rate can significantly reduce your monthly payments, save tons of money over the life of the loan, and allow you to build equity faster. Remember, however, that refinancing does come with costs, so if the costs to refinance are too high or you plan to move soon, it may not make sense to refinance even if you could lower the monthly payment.

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Something I’ve Learned

Have you ever wondered what a cashier’s check is and why it's important for big transactions? A cashier’s check is a form of payment issued and guaranteed by a bank. This means that the seller or lender can be confident that the funds are available from the buyer or borrower.  Unlike personal checks, where the individual is responsible for covering the amount, with a cashier’s check, you've got the bank's guarantee. It's like having a financial safety net! A cashier’s check is super reliable for big transactions like buying a house or a car. 

Quote of the Reflection

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