Ask USAA: Should I refinance my mortgage?
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Since he retired from the military, Marc hasn't found meaningful employment and things are starting to get tight financially. To help with his monthly cash flow, should he refinance to lower his mortgage payments?
YouTube link: http://youtu.be/17QK_9C1Qc4
Hello, and welcome to Ask USAA. My name is Scott Halliwell. We have a question today from Marc in Virginia, and he wants to know, "Should I refinance my current mortgage?"
You know, just to add a little background here, this isn't your typical refinance scenario that's about someone trying to take advantage of today's low interest rate environment. Marc's situation is a little bit different. That is, he recently retired from the military, but he still hasn't found meaningful civilian employment, and as a result, things are starting to get a bit tight for him financially. So to help with his monthly cash flow, he's wondering if he should refinance his current loan to get a lower payment. Finally, he shared with me that he only plans to stay in the home for about five to eight years at most.
So Marc, to figure out what you should do here, let's start by looking at the details of your current loan and the loan that you've said you've been offered by your lender. You said that your current loan interest rate is 5.625%, that you still owe $410,000, and you have approximately 23 years and four months remaining. In other words, you've been paying for a little over 6½ years.
Now, the new loan you said you've been offered is at 5.2%, but the problem is it's going to push you back out to a 30-year mortgage, and it's going to cost you $7,000 in closing costs. So the question is, given these two options, would refinancing this be a good idea?
I'm going to share with you what I think here in just a minute, Marc, but before I do, I want to share with you something that I urge everyone to think about when they're considering doing a refinance, and that is this: It's almost impossible to say for sure what the right answer is here. Why that's the case is because even though you can do the math of each loan, and you can compare the numbers to try to find a winner, doing those calculations involves making a lot of assumptions. The challenge is: Change any of those primary assumptions, like the interest rate environment, the length of the time you plan to stay in the home, your employment situation, et cetera, and you could have what once looked like a really good decision suddenly look like a bad one. So even though we can crunch some of the numbers, the results are only going to be as good as our assumptions are accurate.
Now, even though that's true, to make a decision you have to start somewhere. And I think doing some cost comparisons is a great place to begin. Now, on this subject I urge you to forget about the rules of thumb that are out there, forget about those blanket statements about when you should refinance. You really need to look closely at the numbers of your specific situation, and to do that you're going to need a critical tool for the calculations called an amortization table, and you're going to need one for the current loan you have as well as the new loan that you're considering.
So what is an amortization table and why is it so important? Well, what it is, is it's a table that's going to show you for each payment you make how much of your payment is going toward principle, how much of your payment is going toward interest expense, and it's going to show you the cumulative interest expense at any point in time in your loan. Why this is important is that until you see those details, you really can't make an informed decision about what you should do. By the way, you can get an amortization table from your current lender or there are numerous calculators online that you can use to crunch these numbers.
So what's the right answer in your case, Marc? Well, I crunched some of the numbers for your situation and from what I could see, the interest cost savings of the new loan you're looking at probably wouldn't be enough to make up the cost of the refinance given your timeframe. The bottom line here is there isn't a clear winner in choosing one path over the other. And for me, in the absence of a clear winner, I think I'd be inclined to stick with what you have.
Thanks again for the question. I hope this explanation of how to approach this and what you should do has been helpful to you, and I wish you all the best in finding post-military employment.
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Views and opinions expressed in this webinar are provided for informational purposes only and are subject to change. This discussion is not tax, legal, estate planning or USAA product advice and is unique to the member only. The law concerning tax and retirement plans is complex, penalties are severe, and the laws of your state may differ. Consult with your tax, legal or estate planning professional regarding your specific situation.
Examples given are hypothetical illustrations and not necessarily an indication of the benefits or features of any USAA product.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
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