The Washington Post - 21.03.2020

THE WASHINGTON POST

.

SATURDAy, MARCH 21, 2020

EZ

6

Refinancing

BY MATT ANDERSON

Wall Street is going crazy and

investors are bailing out over the

coronavirus. With the yield on the

10-year Treasury slipping below 1

percent, homeowners have a

once-in-a-lifetime opportunity to

refinance their mortgages. Mort-

gage rates are near record lows,

which could potentially save ho-

meowners who refinance thou-

sands of dollars a year in interest.

Indeed, a multitude of home-

owners did just that: Applica-

tions for refinancing soared 402

percent above this time last year.

How can you be sure if refi-

nancing is the right decision for

you? Here are three questions to

consider before filling out the

mortgage refinancing applica-

tion:

How long do you plan to be in

your home?

If you’re going to refinance, you

should plan to stay in your home

long enough to reach the break-

even point, which is the point that

the refinance actually starts to

save you money. Often, people

think that because the payment is

lower, they save money right

away, but, typically, there are up-

front costs to refinance the loan,

and it takes time to recoup those

costs.

Many people have a misunder-

standing of what the break-even

point is and calculate it as the

upfront costs divided by the

monthly savings. On average, it

takes 12 to 15 months to recoup

the upfront costs. However, this

does not take into account the

balance on the original loan.

When you refinance a loan, you

start the loan all over again, and

the majority of your payments go

toward interest. If you’re five

years into paying off the original

loan, you’ll revert to paying more

interest and may fall behind on

paying down the principal bal-

ance.

As an example, let’s consider

the break-even point on a 30-year

fixed rate, assuming a 3 percent

cost to refinance. Most closing

costs fall between 2 and 5 percent.

If you can decrease your rate by

one percentage point, you are

looking at a little over three years

until you reach the break-even

point. If you decrease your rate by

three-quarters of a percentage

point, it’s closer to 4½ years, and

if you decrease your rate by half a

percentage point, it will be eight

years before you break even. At

one-quarter percentage, there is

not a break-even point, and it is

probably not in your interest to

refinance.

What is the age of your cur-

rent loan?

If you have been paying off

your current loan for a long time,

you are probably paying down a

lot of the principal already. If you

refinance the loan, you have to

take into consideration that it

may take you longer to pay off the

new loan. So even though you will

reach the break-even point, there

may be a second break-even point

later on where you actually start

losing money because the loan

extends.

For example, if you refinance

and reach the first break-even

point five years after starting the

new loan, you may hit a second

break-even point 13 years in

where you start losing money

because you’re paying over a lon-

ger period of time. In this case, if

you plan to be in the home longer

than 13 years, it may not make

sense to refinance.

There are plenty of online tools

to help you determine if refinanc-

ing makes sense given your

unique situation. One of my fa-

vorite calculators is the free Nerd

Wallet Refinancing calculator,

which allows you to enter your

information to see how much

refinancing could save you.

What will you do with the

monthly savings?

To r each your break-even point

earlier, you can use the money

saved from the refinance toward

loan payments. If you continue

paying the same amount that you

did before the refinance, that

additional amount will go t oward

the principal value of the loan.

This is a good practice if you are

planning to stay in the home for a

long time and if you’re looking to

pay down the loan as fast as

possible and pay the least amount

of interest.

Another option is to pay down

high-interest credit cards or oth-

er personal debt. This is an excel-

lent strategy if you have debt with

an interest rate more than 10

percent. If you put the savings

toward high-interest debt, you

essentially make yourself 10 per-

cent or more by paying down the

loan.

The savings can also go toward

investments or other savings,

such as a Health Savings Account

or 529 college savings plan. If you

invest the money, set up invest-

ments on an automatic basis to

regularly contribute to a mutual

fund or retirement plan. You’ll

earn money on top of the savings,

which will help decrease your

break-even point further.

Matt Anderson is director and

financial planner with the Wise

Investor Group at Baird in Reston, Va.

Should you act now, with rates l ow? There’s more to consider.

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