Should I Refinance?

October 29th, 2009

Should I refinance? It seems like an easy question, doesn’t it? But I have read and heard so many different stories, rules of thumb, and methods to calculate whether or not one should refinance it is mind boggling. It is simple, forget all of the rules of thumb that you have heard.

Refinancing is all about asking yourself how much do you have to spend to refinance, and how much would you save. Figuring out what the recapture period is will help you decide if you should refinance or not.

For example, if the closing costs that you would pay to the title company, lender, appraiser, credit bureau, etc. all total approximately $3500, and you are going to save $350 a month by refinancing, then your recapture period is 10 months. And if you believe you will be in the home for 10 months or longer, and the longer you are there the more you will save obviously, then you should refinance.

There is another thing to insert into this question, and that is that if you keep refinancing you will never pay off the mortgage! For example, if you have lived in a house for five years, and have refinanced three times, even if you save money each time on a month-to-month cash flow basis, you also have extended your mortgage such that it will take 35 years to pay off that mortgage instead of 30 years.

For most people that may not matter, because most of us do not stay in our homes for 30, 40, or 50 years. But if you’re going to stay in a house for a long time, possibly forever, you have to be careful about refinancing, and may want to consider a shorter term when refinancing if you have been in the house for quite a while; this way you will preserve your amortization to some degree.

So, at the end of the day, check to see what your recapture period is, and consider how much longer you will live in the home, and make sure you are not refinancing to a new 30 year loan every single time if you’re going to be in the house for the long haul.

And it sounds great to think that you can drop your rate by 1%-2% and can take a 15 Year Fixed Rate mortgage instead of the 30 Year Fixed Rate mortgage you currently have, but you may not save money on a monthly basis. You will save money over the long haul by paying the loan off more quickly, but you may not save money every month. Here are some hypothetical numbers to illustrate the above:

current mortgage:
$340,000 @ 6.375% over 30 years = $2121/mo. (excluding taxes and insurance)

new refinance option:
$340,000 @ 4.5% over 15 years = $2600/mo. (excluding taxes and insurance)

You would think dropping the interest rate almost 2% would certainly save you money, even going from a 30 year loan to a 15 year loan. But you can see you won’t save money on the monthly payment. But…

The 15 Year takes $468,000 to pay off the $340,000. The 30 Year takes $763,000 to pay off the $340,000. If you are in the house for the long haul, take the 15 year mortgage!

As always, make sure you are dealing with a reputable and very experienced mortgage lender. Most lenders will refinance you just to get the commission, with total disregard for whether or not you really should refinance!

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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2 Responses to “Should I Refinance?”

  1. Tracy says:

    Brian – I have a 30 year fixed rate of 5.5 with a loan balance of 125,000. Should I refinance?
    What would the closing costs be on a new loan? How much would I save monthly loan payments?

    Tracy

  2. brianm says:

    Hi Tracy, I recall you are renting your place. So you would get a rental property rate, which right now for a house is 4.375% with 0 point, and for a condo is 4.625%. I believe your place is a house and not a condo. A new 30 Year Fixed of 125k @ 4.375% = $624/month (not including taxes and insurance). How does that compare to your current payment? I don’t know that there are enough savings to justify the closing costs, and the paperwork hassle. Smaller loan amounts need bigger rate reductions to merit the costs and hassle. Let me know what you think, and if you have any other questions.

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