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I've been bombarded from different organizations trying to get me to refinance and wanted to see if there would be any advancement to doing so since interest rates have dropped so much.

My situation is this:

  • Original 2018 loan was refinanced in 2019; I have a current loan balance of 206k on the "new loan", with an interest rate of 4% and monthly payments of 1450$; a quick home value estimate said about 260k for similiar homes in my area.
  • We will probably be selling within 5 years and getting another house in the area
  • I would like to lower my monthly payment, but more importantly I want to have the best possible equity in the house come selling time to make the next mortgage easier, and I'm not sure how a refi effects that.
  • I have had no problems making the payments on either the old or new loan, though money is intermittently tight so I wouldn't want to drop more than a few k on closing costs.

I've tried a few refi calculators and done some search; most refi calculators indicate a "break even point" on a refi would be a few years from now, so probably around or shortly before we would want to sell, so maybe not worth it?...and the general rule of thumb seems to be don't refi if you are going to sell soon because of the closing costs. But the housing market and interest rates are so unique right now that I'm not 100% I shouldn't refi, especially depending on how the refi is actually done.

With the 2019 refi I was able to defer some of my monthly payments and didn't end up paying anything in closing costs, which I would gladly do even if for a somewhat higher interest rate since I'm not looking for long term savings, just significant savings in the next couple years.

TL;DR question If I just want to pay less monthly and be better positioned to sell my house in 3-5 years, should I refi? If so, are there any specific things I need to do to maximize my returns?

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  • "5 years" is a solid rule of thumb for pay back on a mortgage refi.
    – RonJohn
    Sep 7 at 16:29
  • Keep in mind that folding any closing costs into the refi amounts to borrowing against your future equity (because your future equity would be higher if you paid the closing costs out-of-pocket up front).
    – chepner
    Sep 7 at 16:53
  • I assume you are expecting about a 3% interest rate to reduce the payment? Does your current lender have a 'streamline refinance' option? That would have lower closing costs.
    – rtaft
    Sep 7 at 19:02
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The key metric is how long it will take you to pay off the entire closing cost (not just how much you pay at closing) with the interest savings. Don't use the entire reduction in payment, because some of that may be reducing the principal portion that you'll pay back when you sell the house.

So if refinancing saves you $100 per month in interest and you pay $3000 total in closing costs (again, not just what you have to pay at closing, but the total closing costs), then after 30 months you're saving more in total by reducing the amount of interest paid.

If you plan on being in the house longer than the "payback period", then you'll save money overall. If it's close, I would just hold off since refinancing is not a simple process, and you'll spend a lot of time to save a relatively small amount in the end.

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I would like to lower my monthly payment, but more importantly I want to have the best possible equity in the house come selling time to make the next mortgage easier, and I'm not sure how a refi effects that.

When people refinance their mortgage (without it being a cash-out refinance) there are two ways they end up with a lower monthly payment: They extend the loan period; they lower the interest rate.

If the refinance you are looking at does lower the monthly payment, then one way to accelerate the equity situation is to add extra principal payment each month to artificially bring the monthly payment back to the old level.

Pre-refinance monthly payment is $1450, that covers the interest of (1/3 or a percent per month) and the principal payment that will payoff the loan on 2049. I am ignoring taxes and insurance.

Post-refinance with an extra principal payment will bring the monthly amount back to $1450 a month. It will be paid off quicker because you are overpaying the principal. Each month you will move closer to the payoff.

You still have to determine when you will break even, but artificially inflating the monthly payment back to the old level will allow you to have more equity when you sell the house in a few years.

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Should I refinance (again) if I am looking to sell within 5 years?

It doesn't hurt to look, most lenders can get you some solid rate and cost info without running your credit and without you formally applying.

In a shorter period like 3-5 years you'd likely want lender credits to cover some/all of closing costs. It's the opposite of buying points to get the best rate over a longer period of time, you'd sell points to shift the breakeven date closer. You'd also want to shop around for low closing costs (see if your current lender offers an easy/streamlined refinance for existing borrowers).

Just make sure you factor in loan term, amount, closing costs, and rate when comparing options.

I refinanced a property last summer down to 2.94% at no cost because I'm not certain I'll keep it much longer. I don't recall offhand my initial rate, it wasn't a huge drop, but it was still worthwhile because of the no-cost part (lender credits covered closing costs). Many will say no-cost but that just means your closing costs will be added to loan amount so watch out for that.

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