I just got a phone call yesterday from a 45 year old single mom of three.  She heard that rates have gone down and she was excited about potentially refinancing.  She has had her current loan (a 15 Year Fixed) since 2003.  In 7 more years, her mortgage will be entirely paid off.

In 2003, her loan amount was $300k with an interest rate of 5.0%.  Her monthly principle & interest payment is $2372.38.

She wanted to see about refinancing into a new 15 Year Fixed.  Since she has paid down $114,200 on principle, her new loan amount (to pay off the existing loan) will be $185,800.  When I quoted her yesterday, the 15 Year Fixed rate for her situation was 4.375% (APR 4.635%) <Closing costs will be $3200>.  The new monthly payment will be $1409.52.

She will save an incredible $962.86 on her monthly payment. Because she has to pay $3200 in closing costs, her true recovery period (true savings) will occur in 3.3 months, which is a short amount of time and nearly moot as a consideration.

From the perspective of monthly payment savings, it absolutely makes sense for her to refinance.

But there are more questions to ask, and more considerations that she needs to take into account. I encourage all of you to remember to align all of your goals.  What are her overall short-term and long-term goals and needs.  As a single mom, is she struggling to make her payments and does she need the immediate payment relief?  Or is she doing okay and is it more important for her to ultimately pay off her loan as soon as possible?  What will her situation be in 7 years and in 15 years?   Getting into a new 15 Year Fixed will extend her payoff period: instead of paying off her entire mortgage in 2018, it will now be paid off in 2025.  Does she need the tax advantage?  Is it more important (or necessary) for her to reap the short-term benefit of refinancing (helping her save money if she’s struggling), or is it more important for her long-term goals to pay off her mortgage as quickly as possible?

I cannot stress enough the importance of making decisions in context with both your short and long-term goals, and working with people that are willing to look out for you.

I was also able to provide her with a different loan product option: a 10 Year Fixed, which is 4.25%.  With a 10 Year Fixed, she will pay off her mortgage in 2020.  The monthly payment is $1903.29, so she will still realize a monthly payment savings and her payoff period will only be extended by two additional years, which may meet both of her goals.

Having a good team of people looking out for you and understanding your needs and goals is very important.  This is a conversation to have not just with yourself, but also with your CPA and financial advisor.