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“Refi-Eligible” Property Owners Reach Record High—But Should You Refinance?

G. Brian Davis
5 min read
“Refi-Eligible” Property Owners Reach Record High—But Should You Refinance?

A record number of Americans are eligible to refinance their mortgages, according to a recent report by industry analyst Black Knight. (1) With interest rates taking a surprising downward turn in mid-2019, suddenly many loans originated as recently as 2018 now qualify as candidates.

But does that mean you should refinance, just because you’re eligible?

Here are the facts, and more importantly, the reasons both to consider refinancing and to leave your mortgage as-is.

Record High Refi-Eligible Americans

Among Americans with 30-year mortgages, over half are now paying interest at least 0.75 percent higher than today’s going rate.

Not all of them qualify for a refinance, of course. But a record high number do: 11.7 million Americans have sufficient credit and equity in their property to refinance for a rate at least 0.75 percent under their current interest rate.

And in the second quarter of 2019, untapped equity in U.S. homes also reached a record high of $6.3 trillion ($6,300,000,000,000)—a sum so vast it’s hard to wrap your mind around it.

With interest rates hovering in the mid-3 percent range, borrowers have access to cheaper funding if they want it. But should they take it?

Related: The 3 Major Reasons It Makes Sense to Refinance a Property

Reasons to Refinance

The reasons to refinance are more obvious than the reasons not to, so I won’t belabor the points.

First, of course, you can potentially lower your monthly mortgage payment. For landlords, lower payments help improve their cash flow, and could even push a property with negative cash flow above water—a worthy enough reason to refinance, if the savings is significant.

Second, investors can tap into equity to pull out cash and buy another property. It could be another rental property, or funding for a flip. Or perhaps you’ve been meaning to make some upgrades to your existing properties to justify higher rents and better quality tenants?

While those are all good reasons to pull out equity, many homeowners abuse cash-out refinances. They spend the money on a home renovation that costs more than it adds to the home value, or they go on vacation, or they just spend it on a richer lifestyle.

If you have a detailed plan for how you’ll invest the money from your cash-out refi, then don’t let me stop you. Just make sure you’ve run the numbers inside and out, and you’ve considered the reasons not to refinance, as well.


Reasons to Avoid Refinancing

The reasons not to refinance prove slightly more complex, and dare I say it—mathematical—than the reasons to refinance.

Whip out that trusty calculator and get ready for flashbacks to 10th grade math with Mrs. Peterson. Just kidding, no calculations are required, but you will understand how amortization works within the next few paragraphs!

The Life-of-Loan Costs Go Up

To begin with, you’ll have closing costs when you refinance. And not in negligible amounts, either.

Plan on closing costs in the thousands, from appraisal fees to title and legal fees to lender points and junk fees. The points alone often cost thousands, before even getting into the junk fees like “administrative fee” and “processing fee” and “now-we’re-just-charging-you-because-we-can fee.”

Those closing costs will take years, possibly decades, for you to recover in the form of lower mortgage payments. And that’s if your mortgage payment is lower, which it probably won’t be if you’re pulling cash out.

Start with a simple breakeven horizon calculation. How many years will it take you to break even, for your lower monthly payments to make up for the thousands in closing costs? If your monthly payment is $50 lower, you save $600 per year. If your refinance costs you $3,600 in closing costs, that means a breakeven horizon of six years.

Hardly the slam dunk you were hoping for. And that says nothing of additional interest.

Look up how much total interest you have remaining on your current loan—not your principal balance but the sum of all remaining interest payments.

Next, compare that amount to the total life-of-loan costs (interest and closing costs) of the new loan. If your existing loan will require $100,000 in interest over its remaining life, and your new loan will cost you $160,000 in interest and closing costs, but you’ll only receive $30,000 in cash out, do you think that’s a good deal?

Related: Should I Refinance My Mortgage Even if It Only Saves Me $50/Month?

Amortization Reset

A certain percentage of your monthly mortgage payment goes to interest, and certain percentage goes to paying down your principal balance. But here’s the thing: those percentages change over time.

When you first take out a mortgage, nearly all of your monthly payment goes toward interest, and only a fraction goes toward principal. As the months go by, the proportion of your payment that goes toward principal shifts ever so gradually, with more of each payment going toward principal and less lining the bank’s pockets.

This is precisely why lenders push you to refinance, as soon as you’re “refi-eligible.”

They want to keep you in that initial high-interest phase of the mortgage permanently. To do that, they try to tempt you to refinance, because that restarts your amortization back to Square 1. Thus, the further along the amortization schedule you get, the more they’ll try to tempt you with “special offers” and other sales gimmicks.

Here’s an example of how monthly payments look over the course of a 30-year loan:

Interest Amortization Graph

The longer you have a loan, the less you’re paying the bank in interest. So without a really good reason to refinance, I almost never do.

Get the cheapest loan possible right up front, then keep it until it’s paid in full.

Debt Adds Risk

There’s a reason why financial advisors urge people preparing for retirement to pay off as much debt as possible.

Debt creates more risk for you as a borrower. With higher debt liabilities and higher monthly costs, you need more income to cover your expenses. If something happens to that income, you’re in a lot more trouble if you have more debt.

Imagine two landlords with identical homes side by side. One has a mortgage costing $1,000 per month, and the other owns the property free and clear. In a stroke of bad luck, the tenants of both units move out simultaneously. And not only are the landlords not receiving any rental income, they also need to spend a few thousand dollars on new paint, new carpets, and other regular maintenance.

One of these landlords is in dramatically worse shape than the other—to the tune of $1,000 every single month that goes by with the property vacant.

Debt can be useful, when used skillfully as a tool to create wealth. But the more debt you have, the higher your financial risk. Period.

Final Thoughts

There are sometimes good reasons to refinance, whether as a homeowner or landlord. But just as often it merely adds unnecessary extra closing costs, life-of-loan interest, and risk in your portfolio.

Be strategic about using debt to acquire income-producing properties. Leverage helps you build a portfolio at speed. As you grow your portfolio and start moving closer to financial independence, start thinking about paying down debts rather than growing at the fastest pace possible.

At a certain point, it makes more sense to reduce your liabilities and earn more money from fewer properties. Each property takes work to manage, after all!

Most of all, run the numbers before committing to a new mortgage, because you’re working with sums in the thousands of dollars that you would ordinarily treat with grave reverence. It’s only the context of hundreds of thousands of dollars in loans and values that sums like $5,000 look small, so fight your brain’s instinct to treat it as relative and treat it with the full respect it deserves.


  1. https://www.housingwire.com/articles/50098-cheap-rates-create-record-high-in-refi-eligible-population/

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Are you considering refinancing in light of today’s low interest rates? Why or why not?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.