When Does it Make Sense to Refinance?
Refinancing your home loan makes sense only if you are able to have a monetary or security based gain. There are a few basic things you need to know when analyzing the merits of a refinance.
First you need to know the exact numbers of your existing loan terms.
Some of these items are:
- Current principal balance
- Current interest rate
- Original length of the loan (how many years to pay off)
- Amount of the principal and interest payment
- Is there a pre-payment penalty?
Often you can find this information on your coupon book on the first few pages or on your monthly statement sent out by your lender. If the information is not in either of these places, you can find it on the NOTE that you signed in escrow.
The next step would be to call us for the current interest rate at 1-866-787-0300.
If you want to research the effect of various interest rates and repayment periods use our "monster" calculator.
You also need to know the exact amount of NON-RECURRING closing costs (costs to refinance the loan.) Included in these costs are:
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RECURRING COSTS include:
- Interest (prepaid and accrued)
- Property Taxes
- Homeowners' Insurance
- Mortgage Insurance (if applicable)
- Any Impounds for the Above Recurring Costs
The reason for not including the recurring costs is that these costs are not new. You would have to eventually pay for these even if you did not refinance.
Here is an EXAMPLE of the process:
- Using a CURRENT loan balance of $150,000
- Using the CURRENT interest rate on this loan of 8.5% ($150,000 x 8.5% = $12,750 annual interest)
- If the interest rate lowers to 7% when you refinance, the total closing costs would be approximately $2500
Your calculation would look like this:
- Take the loan balance (still $150,000)
- Use the NEW interest rate of 7%
- $150,000 x 7% = $10,500 annual interest (proposed)
- $12,750 annual interest (present) less $10,500 annual interest (proposed) = $2250 savings.
- $2250 divided by 12 = $187.50 per month.
- Now you need to take the $2500 in non-recurring closing costs, divide by the monthly savings of $187.50 and you come up with 13.33.
- This means that it will take 13.33 months before you break even.
So you need to ask yourself; will you own the home for more than 13.33 months? If yes, then you would benefit by refinancing. If no, then you probably should not refinance.
The above example is based on refinancing a fixed rate loan to a fixed rate conventional loan. If you have an adjustable rate mortgage, the reason to refinance may have more to do with the security of changing to a fixed rate than just interest savings.
Some clients have been concerned that unless they're dropping the interest rate by at least 1 to 2 percentage points, that is not worth refinancing. If you're planning on staying in your home for a while, that's not necessarily true.
If you're currently paying mortgage insurance (PMI or MI) as part of your monthly house payment, and home values have gone up in your neighborhood, you may want to see if you can eliminate it. Keep in mind, also, mortgage insurance is not tax deductible.
If you're like many, credit card debt may be overwhelming your checkbook. By refinancing your home loan while consolidating consumer debt, you're in a better position to regain financial control.
Even if refinancing your home loan only saves you $75 per month, an investment of that $75 each month in a conservative mutual fund at 10% yields $31,085 in 180 months - and $169,537 in 360 months! Why not let your money work for you instead of the mortgage banker?
Or you may (again talk to your financial advisor before making and decisions) apply the savings toward the house payment. An extra $75 per month will reduce a $100,000 30-year mortgage into a 22-year mortgage. And you will save over $47,000 in interest!
In any case, refinancing does not always make sense. Feel free to use the Refinance Pre-qualification, we will be happy to give you some direction.