Dave Says: When Refinancing Your Home Actually Makes Sense

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Posted: May 30, 2019 12:19 PM
Dave Says: When Refinancing Your Home Actually Makes Sense

Source: AP Photo/Seth Wenig

Dear Dave,

I recently started following your plan, and I’ve looked into refinancing the home I bought five years ago to free up more money to put toward paying off debt. My interest rate is 3.625 percent, along with a private mortgage insurance payment of $200 per month. This makes my mortgage payment $2,700 a month, and I owe $325,000 on the house. I was offered a re-financing plan that included a monthly payment of $2,576 with no PMI, but the interest rate would be 4.6 percent. What do you think?  

Phil

Dear Phil,

You don’t need to refinance with those numbers. You’d be going up more in terms of interest rate than you’d save with no PMI. The only reason the payment is going down is that you’d be agreeing to stay in debt longer. 

Now, if you could’ve lost some of that interest rate, and gotten rid of the PMI, that might have come close to making sense. But, even that might not have worked in the end, because you’d have closing costs associated with the deal. 

There’s no way this deal is a good idea. You’d essentially be going up a full percentage point in terms of interest, and all you’d really be doing is resetting, or re-casting, the loan. Basically, you’d be starting over on the loan. That’s why the larger payment and PMI would go away, but you’d have a significant increase in your interest rate. 

Where you’re at right now is fine, Phil. You’re off to a good start, so just keep on moving forward with getting out of debt and gaining control of your finances!

—Dave