Should You Refinance Your Mortgage? Here's What Dave Ramsey Thinks

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  • Dave Ramsey recommends you refinance your mortgage if you plan on living in your home for a long time.
  • Refinancing that puts you further in debt is a bad idea and puts your home at risk.
  • Before refinancing, Ramsey recommends calculating your savings and a break-even analysis.

Dave Ramsey says you should refinance if you fall into these categories.

Last year, the annual average mortgage interest rate for 15-year mortgages was 2.27%, and for 30-year mortgages it was 2.96%. These were the lowest rates since 1991. In order to combat high inflation, however, the Fed has started its series of interest rate hikes. The average mortgage rate for a 30-year mortgage is now above 5% and could continue to rise throughout the year.

With more interest rate hikes scheduled for this year, does it make sense to refinance your mortgage? According to Dave Ramsey, it all depends on your timing. And the timing isn’t always based on interest rates. Ramsey states that refinancing your mortgage is generally worth it if you plan on staying in your home for a long period of time. 

When should you refinance your mortgage?

Ramsey recommends that you should refinance your mortgage if you fall into these categories:

  • You can switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. You may start off with a lower rate with an ARM, but then your rate can change based on a wide range of factors. Since ARMs transfer the risk of rising interest rates to the homeowner, Ramsey states that in the long run, an ARM can be very costly. Refinancing into a fixed mortgage can be worth it to avoid the risk of your interest rate going up.
  • You can reduce your mortgage to a lower rate. If you have a higher interest rate even with the recent increase in mortgage rates, then refinancing to a lower rate can save you money. Ramsey recommends that it may be worthwhile if you are able to find a loan that is 1 to 2% lower than your current one. 
  • You can shorten the length of your mortgage. Ramsey is big on 15-year mortgages. You are able to pay the house off quicker and save money by skipping 15 years of interest. If you have a 30-year mortgage, then he recommends refinancing into a 15-year one as long as the new payment is not more than 25% of your take-home pay.
  • You can consolidate a second mortgage. If you have one and the balance is more than half your annual income, then Ramsey recommends refinancing your second mortgage with your first one. 

When is refinancing a bad idea?

While the four reasons listed above are good reasons to refinance, according to Ramsey there are reasons when refinancing is a bad idea. Here are some examples:

  • Buying a new car
  • Paying off credit cards
  • Remodeling any part of your house
  • Rolling up other debt into a refinance mortgage

Ramsey states that any time you refinance your mortgage that puts you further in debt is not good. Decreasing your home equity to pay for items you don’t need can put your home at unnecessary risk. 

Do a break-even analysis

Before refinancing, Ramsey recommends calculating your refinance savings and doing a break-even analysis to see if it is worth it. You can use our mortgage calculator to see what your new monthly payment would be as well as compare how much interest you will pay with the new mortgage.

Doing a break-even analysis can be a little more tricky. This is where you calculate how long you need to live in your home to make a refinance worthwhile. Closing costs can average 3% to 6% of the loan amount. Once you know how much you have to pay in closing costs, you can then compare the amortization schedule of the current mortgage to the refinanced one to calculate your savings. 

For example, if you have a $190,000 mortgage and the closing costs are 3%, then you are paying $5,700 to refinance your home. If your old mortgage is a 30-year mortgage at 4%, using the mortgage calculator, you see that you would be paying $21,600 in interest over the next three years. Refinancing into a 15-year mortgage at 3% would cost you $15,700 in interest the first three years. After subtracting the refi interest from the original loan interest, the amount you would save is $5,900. This is more than the $5,700 in closing costs. 

This means that in three years you would break-even on refinancing your home. After that, you will see the savings accumulate. However, if you plan on moving in the next one to two years, then it isn’t worth refinancing since the amount saved will be less than the closing cost. 

According to Ramsey, refinancing is based on your situation. If you are planning on moving soon or want to add more debt into your refi, then he believes it is not worth refinancing. If you want to get a shorter term, lower your mortgage rate, or consolidate a second mortgage, then refinancing may be worth it.

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