Thinking of Refinancing? What Your Mortgage Broker Won't Tell You

On December 5, 2023 Mortgage rates are coming down and you might think this is a good time to refinance. But is it? Here’s what your mortgage broker never told you. You should consider refinancing when the savings generated from refinancing your old mortgage is greater than the costs of originating a new mortgage. First, let’s look at the costs of origination. The typical cost to underwrite a mortgage is typically 1-2% of the loan amount. So if your mortgage is $500,000 the underwriting fee would be at least $5,000. You will also likely incur out of pocket expenses to refinance that include an application fee, attorney fee, title search, appraisal, and a local recording fee. Expect to pay another .5% for these additional fees or an additional $2,500. Add these up and your cost hurdle is $7,500. Will your savings exceed the costs? Now, let’s look at your savings. For this, you will need a mortgage calculator or go online to www.mortgagecalculator.org. Input your expected new mortgage interest rate, loan amount and new term to maturity. Subtract the total monthly payments on your new loan from the total monthly expenses on your old loan. This is your gross savings. Does the savings from refinancing exceed your costs? Great, but remember to compare apples to apples. Here’s something most people dont know. You can ask your mortgage broker for a loan that matches the remaining term of your current mortgage so you can compare the two loans side by side. Also, remember that your out of pocket costs are in today’s dollars and your savings are spread out over the term of the new loan so the present value of those future savings have to be discounted back to the present. In short, you need to compare the costs of refinancing to the present value of the savings generated. Just because you are paying less per month doesn’t mean you are saving money. Calculate how long it takes you to recoup the cost of refinancing. Will you stay in the home at least this long? If not, your savings are not enough to refinance your current mortgage. If you need help with this calculation you can contact Compound Wealth Advisors, a fiduciary advisor wealth management firm.

Refinancing can be a smart move, but it is rarely the no-brainer the ads suggest. A new loan resets the clock, comes with closing costs, and can quietly extend how long you carry debt — sometimes well into San Diego retirement. Before you sign, it is worth running the real numbers for your situation. The right answer depends on your interest rate, how long you plan to stay in the home, your other goals, and where you are in your financial life. A refinance that makes sense for a 35-year-old may not make sense for someone five years from retirement. For example, individuals navigating Social Security claiming, complex tax-efficient withdrawal scenarios, or Roth conversion might view debt differently than others. Meanwhile, those dealing with Medicare planning, sudden wealth, the loss of a surviving spouse, or complex wealth transfer plans may need a different perspective. We recommend consulting a professional rather than relying solely on a robo-advisor. We look at a refinance the way we look at any decision — as one piece of a coordinated plan, not in isolation.

Start with the break-even point: divide your total closing costs by your monthly savings to see how many months it takes to come out ahead. If you might move or pay off the loan before then, refinancing may cost more than it saves. Look beyond the monthly payment, too. A lower payment achieved by stretching a 15-years-paid loan back to 30 years can mean paying far more interest over time. Compare total interest and the loan’s end date, not just the monthly figure. Finally, factor in your broader plan: liquidity, other debts, and whether the cash freed up will be invested or spent.

Carrying a mortgage into retirement is not automatically good or bad — it depends on your rate, your tax situation, your liquidity, and your comfort with debt. A low fixed-rate mortgage can be reasonable to keep if your money can do more elsewhere; for others, the peace of mind of owning the home outright is worth a lot. What matters is that the decision fits your income plan. Your mortgage payment is part of your fixed expenses, and how you handle it affects how much you need to withdraw — and therefore your taxes. There is no one-size-fits-all answer, which is exactly why it deserves a deliberate look.

For some retirees, tapping home equity through a downsizing, a HELOC, or a reverse mortgage can be part of a thoughtful plan — but these are significant decisions with real trade-offs and costs, and they are easy to get wrong. They should never be entered into under sales pressure. The key is to weigh any home-equity decision against your whole picture: your income sources, your estate goals, and your need for flexibility. What looks like a quick fix can have long-lasting consequences. As a fee-only vs fee-based fiduciary advisor, we have no product to sell you here — just an objective look at whether a given option actually serves your goals.

The case for refinancing depends heavily on where rates are relative to your current loan and how long you plan to keep the mortgage. A meaningful rate reduction with years left to run can justify the closing costs; a small reduction, or plans to move soon, often will not. Your timeline matters as much as the rate. If you may sell, downsize, or pay off the loan before you reach the break-even point, refinancing can cost more than it saves. Be honest about how long you realistically expect to stay. It also helps to consider the type of loan. Trading an adjustable-rate mortgage for the certainty of a fixed rate, or vice versa, can be about managing risk as much as saving money — another reason the decision should fit your broader plan rather thanchase a headline rate. We look at all of these together, because the right answer is personal and time-dependent.

A lower monthly payment frees up cash flow, but what you do with that cash matters. Reinvesting the savings or paying down higher-cost debt can make a refinance worthwhile; simply absorbing it into higher spending may not. There is also an opportunity-cost question. Money spent on closing costs, or equity tapped through a cash-out refinance, is money not invested elsewhere. Weighing the guaranteed cost of the loan against the potential of other uses is part of a coordinated plan. For retirees and pre-retirees especially, a mortgage decision ripples into your income plan and taxes — how much you need to withdraw, and therefore what you owe. It should never be made in isolation. The goal is a decision that improves your whole financial picture, not just one line on a statement.

Before signing, get clear answers to a few questions: What are the total closing costs, and what is my break-even point? How does the new loan’s total interest and payoff date compare with my current one? Am I extending my loan term, and if so, is that worth the lower payment? Then widen the lens: How long do I realistically expect to stay in this home? What will I do with the monthly savings — invest, pay down other debt, or absorb into spending? And how does carrying or eliminating this mortgage fit my retirement income plan and taxes? Finally, be wary of anyone pressuring you to act fast or rolling lots of costs into the loan where they are easy to overlook. A good refinance still makes sense after you have read the fine print and slept on it. Because the answer depends on your whole picture, this is exactly the kind of decision we help clients think through objectively — with no product to sell.