It's been roughly 18 months since SMI last looked at the ins and outs of refinancing a home mortgage. But some things have changed since then that merit taking another quick look at the issue. What's changed?
- Interest rates have already starting rising. They're roughly a full percentage point higher today than the 3.44% low of Dec 2012. This isn't an "interest rates may rise someday" story — for mortgages, it's already happening. And the rise in mortgage rates is expected to continue as the Fed cuts back on its bond purchases.
- It's gotten easier for many to qualify for a new mortgage. A few factors contribute to that trend: better employment situation for many people, home equity values have bounced back, and banks are arguably a little more willing to lend now than a few years ago.
All of that to say, if you tried to refinance a couple years ago but weren't able to, it's worth checking on it again. This is one financial decision where some effort and initial investment can save you thousands (perhaps even tens of thousands) of dollars down the road.
Matt Bell did a good job illustrating the main points to consider when refinancing in SMI's last article (linked to above). This recent Wall Street Journal article expounds on a couple of the points made there.
First, it details how it's easy to do the math wrong based on the fact that you're usually replacing a shorter mortgage with a longer one (which will always make the payment look smaller). For example, if you're ten years into a 30 year mortgage and replace it with a new 30-yr mortgage, you're effectively replacing a 20-yr mortgage with a 30-yr one. In other words, you're now spreading out 20 years of payment over 30 years instead.
What to do? In the example above, you should compare your current monthly payment to the payment on a hypothetical 20-year mortgage at current interest rates. You can do that using one of the many online mortgage calculators. That will tell you how much refinancing will truly save you each month.Second, the author addresses the importance of paying off the mortgage by the time you retire (an increasingly counter-cultural idea at a time when over 40% of 65-74 yr. old households are still carrying a mortgage on their primary residence).
But retiring with a mortgage simply isn't a good idea. Why not? Those monthly payments will add substantially to your retirement expenses, leaving you with less money for everything else. Moreover, to cover the mortgage, you might be forced to sell stock-market winners or make larger retirement-account withdrawals, both of which would boost your taxable income. That increased taxable income could, in turn, trigger taxes on your Social Security retirement benefit. In effect, paying the mortgage could lead to a double tax hit.It's important to recognize that today's rates, while higher than they were 18 months ago, are still historically "great". Some will be inclined to push their rate even lower through the use of a 15-year mortgage. We're all for that if you can really afford it. But be careful about cutting your budget too tight in order to make it happen. That's especially true if your job/income situation is unstable, or if your savings reserve isn't fully funded.