Andrew Farmer

Pretty much everywhere we go now, we have access to free WiFi.  We have it in malls, grocery stores, hotels, place of employment, doctor’s offices, even our cars can be rolling hot spots.  With my mind on my money and my money on my mind, I thought, wouldn’t it be nice if I could ReFi my mortgage for free!  With that, let’s take a look at the largest debt on most folks’ balance sheet – their mortgage.  Current 30-year mortgage rates are between 4.0% and 4.25%, the same range they have been in for the past few years.  Current 15-year mortgage rates are between 3.25% and 3.75%.  Wisely, a lot of folks have jumped on these low rates and refinanced their home.

The conventional rule of thumb with mortgage refinances is you shouldn’t refinance unless you are going to shave at least 1% from your current rate.  Like all rules of thumb, it doesn’t fit everyone.  It also begs the question, “Why 1% –  why not 0.5% or 2%?”  The fact is, your refinance comes with a cost.  As much as $3,000-$6,000, or higher, depending on your loan balance.  From there, it is simple break-even analysis done with any amortization tool.  The idea behind the 1% rule of thumb is that you are able to break even between years two and three.  Another option is a fixed-rate home equity loan.  A fixed rate home equity loan?  Yes, it accomplishes the goal of refinancing, at a fraction of the cost.  If you itemize deductions, interest is still deductible up to $100,000 – be sure to consult your tax advisor.  Rates are good, with a local financial institution offering 2.99% on a 10-year fixed rate with closing costs as low as $200.  It comes with a “disclaimer,” meaning a few things need to align to get one, but you get my point, it’s significantly cheaper.

So, you ask, am I a good candidate for this home equity option?

  1. If your loan-to-value is around 65% or under, you are a good candidate.  Some institutions will do a home equity loan up to 80% loan-to-value.
  2. If you are retiring in five to ten years or less, and do not want to take a fixed-cost mortgage into retirement, you are a good candidate.
  3. If it’s for your primary residence, you are a good candidate.
  4. If you are toward the end of your current mortgage and the principal is declining quickly, but it’s in the 5% (or higher) range, you are a good candidate.

The idea that costs matter falls directly in line with our investment philosophy.   Minimize cost in the portfolio, and you lower the hurdle you need to overcome to maximize return.  Same with the refinance; lower the closing cost and you shorten, or possibly eliminate, the break-even period.

Like most things, it is not a fit for everyone.  Consider the home equity option as another arrow in your quiver if you are considering a mortgage refinance.


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