This weeks Open Mic question comes from Jim LeRitz in Pittsburgh, Pennsylvania.

With interest rates at historic lows, my wife and I have explored the idea of refinancing our home.  After doing our homework we able to lock in a rate of 5.05 percent.  We are currently at 6.85 percent.  The difference would save us almost $300 a month on our mortgage payment, on top of the overall interest it would save us.  The problem is the closing costs would be about $2,800, and since this is something we weren’t saving for, it would have to come out of our emergency fund.  Is tapping into our emergency fund to take advantage of this great rate a good idea, or should we save for the closing costs and cross our fingers the interest rates will still be this low when we save enough?

Great question, Jim.  Normally I would advise to never touch your emergency fund for something that is not a necessary expense, but let’s look into this one a little deeper.

The first question I would ask is how long you plan on living in your house?  If you plan to be gone in five years or less, I would probably pass on the refinance.  The largest gain you will get out of refinancing into a lower rate is the interest you will pay on the loan.  The shorter time you will spend in the house, the less these savings will be.

On the other hand, if you plan to live in this house for the life of the loan, it is almost certainly a good idea to take the lower rate.  Depending on the balance of your mortgage, a 1.85 percent cut in your interest rate could add up to a huge savings in total interest paid.

You can use an online calculator to figure out how much money you would save over the life of your loan, including the costs to refinance, by clicking here.  All you need is the balance of your mortgage, your current interest rate, how many months remain on your current mortgage, your new interest rate, the number of months in your new mortgage and the closing costs.  Enter these and it will calculate how much you would pay monthly and how much you would pay total.

As for tapping your emergency fund to pay the closing costs, my opinion is that this is an acceptable use of it, as long as you use the monthly savings in your new mortgage payment to re-fund it. 

Think about how long you will be in your home, use the calculator to estimate your savings, and if the refinanced loan will save you money, I say go for it!  Make sure to let us know what your decision is and how it turns out.

What advice would you give Jim?  Should have tap his emergency fund for some long-term savings?

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