Time to Refi?

Dear Dr. Per Cap:

With interest rates so low I think it might make sense to refinance my mortgage.  Is this a smart move?


Happy Homeowner

Dear Happy Homeowner

Like I say so often in this column – it depends.  I’m not trying to dodge your question but there are a bunch of factors to consider before pulling the trigger on a mortgage refinance.

A refi is an appealing option that can save a homeowner tens of thousands of dollars in monthly mortgage payments if you qualify for a significantly lower interest rate.  Moreover, if your home has increased in value, like so many homes over the last few years, you might be refinancing a home that’s worth a lot more money than when you bought it.

Why does that matter?  If you’re currently paying private mortgage insurance (PMI) which is required when a borrower owes more than 80% of the value of a home, a refi might lower that percentage and increase your equity (the amount you own) to more than 20%.  That’s the magic number for when PMI is no longer required.  Eliminating PMI can save a homeowner between $30 and $70 in premiums each month for every $100,000 borrowed.  That’s extra savings in addition to lower interest payments.  Kind of like double dipping on your favorite ice cream – more chocolate chip cookie dough please!

It’s also a good rule of thumb to only refinance if you can secure a new interest rate at least one percentage point lower than your existing rate.  That’s to cover your refinancing fees and expenses, like an appraisal, which I’ll talk more about in a minute.

As of December 2021 Bankrate lists the average annual percentage rate (APR) for a 30 year fixed refinance at 3.24% and for a 15 year fixed refinance at 2.51%.  So if your current APR is 4.5% or more a refi might make sense.

However, borrowers often overlook the fact that a refi is a brand new loan that will replace your existing mortgage.  That means you’ll have to repeat the loan qualification process.  Any credit mishaps that have lowered your credit score since you secured your first mortgage could now come back to haunt you in the form of a higher APR.

Moreover, any changes to your debt-to-income ratio can also spell trouble.  A drop in income due to the pandemic or a new truck loan that you thought was a great deal – yep, that stuff can result in a higher APR.

You also will probably need a new appraisal on the home because the bank wants to know what it’s currently worth.  This might mean an appraiser inspecting your home both inside and out.  They’ll notice the door the cat scratched down to bare wood, the dent in the wall where someone accidently threw a football during your last Super Bowl party, the worn down carpet that looked so good when you moved in, and a bunch of other little dings that might need fixing.  You guessed it, time and money.

But don’t let me discourage you.  A refi can be a great move, provided you do your homework.  Here’s a handy online mortgage refinance calculator to help you make an informed decision.


Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.