28 Dec Trump, higher rates and your mortgage

Q. I hear interest rates will probably go up with Trump. My rate is 5 percent on a 30-year fixed with 17 years to go. Should I refinance now? Or not bother because of closing costs?
— Unsure

A. You’ve had your loan for 13 years already, and you’ve missed some great opportunities to refinance.

That doesn’t mean it’s too late, but sheesh! Where have you been?

“You had two opportunities to refinance at historically low rates in late 2012 to early 2013 and then again in mid-2016,” said Andrew Novick, a certified financial planner and estate planning attorney with The Investment Connection and Brookner Law Offices in Bridgewater. “Rates on a 30-year mortgage are still lower than when you took out your loan 17 years ago, but have ticked up significantly since Trump was elected.”

As you point out, lower mortgage rates don’t always mean that it is wise to refinance because of the closing costs, Novick said. The size of the outstanding balance and how long you plan to remain in the house are also factors.

“The smaller the outstanding loan balance, the less likely it is that refinancing will be justified,” Novick said. “Similarly, the sooner you plan to sell the house, the less likely refinancing will be justified.”

He said your current income, net worth, and credit score will impact the rate of a new loan, which will also affect the analysis.

Assuming that your financial situation will allow you to refinance with a conventional 30-year mortgage at the current national average rate of 4.16 percent, you plan to stay in the house indefinitely, and your loan balance is a decent size, you should investigate refinancing immediately, Novick said.

He offered this example. If your original loan was $250,000, your payments should be about $1,355 per month excluding real estate taxes, insurance, and any homeowner association fees. You should have about $183,000 left on the loan (assuming you never made any extra payments). Refinancing into a new 30-year loan can lower payments to around $900 per month.

“That’s a $455 per month reduction,” Novick said. “Typical closing costs will be covered after just a few months. However, you should review how to handle closings costs with your lender.”

He said in order to avoid any out-of-pocket closing costs, you can generally opt to add the closing costs to the outstanding balance of the new loan or accept a slightly higher interest rate — each of these options will increase your payments.

While lower payments can be great, keep in mind that refinancing into a new 30-year loan starts a new 30-year repayment schedule.

“Although your monthly payments will be lower, you’ll actually be making more than $47,800 of payments over the life of the new loan than if you keep your current loan with 17 years left,” Novick said.

He suggests a better alternative could be to refinance into a new 15-year mortgage.

“The national average rate on a 15-year conventional loan is currently 3.37 percent, which will require payments of about $1,315 per month,” he said. “While this is barely lower than the payments of the existing loan, the new loan will be paid off two years earlier and you’ll save nearly $40,000 of interest costs along the way.”

Novick said it certainly seems as if long-term interest rates are heading up, so he says you should investigate refinancing options considering your situation and goals with a trustworthy lender as soon as possible.

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This post was first published in December 2016.