Refinance

Is it always wise to refinance when the rate offered is lower than your current mortgage rate for the same terms?

Provident Credit Union came to my company and offered a fix rate of 2.850% for their 10 and 15-yr term mortgages. As an employee of my company, Provident was discounting another 0.125%, which lowers it 2.75% for a 10 or 15-yr loan. I was overjoyed since I have been looking for another opportunity to refinance my mortgage for awhile now. My current mortgage is at 3% for a 15-yr loan.

I purchased my new home eight and a half years ago and I have already refinanced it four times. Each time is to lower the borrowed amount, lower the interest rate and/or change the loan terms. I have a small loan balance now and currently my mortgage payment is $829. That is less than one-third of rent, if I were to rent a similar sized home in my area.

To reach financial independence, I have to increase my passive income or lower my monthly expenses so that the passive income can cover the monthly expenses. To increase my passive income, I am increasing my investments through dividend paying stocks. To lower my monthly expenses, I thought one quick way is to refinance my current mortgage with the lower 2.75% interest rate.

I thought wrong. The calculation just doesn’t pan out. With my current loan amount, if I refinanced, my monthly payment would drop to $543 and it would save me $1,722.24 on the total payments. The part where I overlooked was the closing cost. The out of pocket closing cost for this loan is somewhere between $2,800 to $3,500. In the best case scenario I would still be out close to a thousand dollars.

In conclusion, not all loans will save you money even if the interest rate is lower than  your current rate with the same terms. This refinance will save me money if my loan amount is greater than $250K. I didn’t calculate the exact break even point, but I think it’s somewhere between $150 to $200K. What is the lesson learned here? Remember to always do your own calculations before you refinance

Lady Butterfly

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