Mortgage Refinance: You Have To Think Long Term

When it comes to a mortgage refinance, it’s less about how much you’ll spend and more about how long you’ll stay.

It’s generally a good time for a mortgage refinance when:

• Mortgage rates drop at least 1% below your current rate.
• You’re planning to stay in your house long enough to justify the closing costs.

Do the math
No. 2 above requires some calculation on your part. To figure it out, you’ll need to know:

• The closing costs for a new loan. Ask potential lenders—costs usually run 3% to 6% of the loan amount. Lenders may finance these costs (that is, fold them into your loan amount), so you don’t actually have to write a check, but you’re still paying for it.
• Your current mortgage payment.
• Your potential new payment. Again, your lender can give you this.
• The length of time you plan to keep your home.

To simplify these calculations, do a quick search online for various free mortgage refinance calculators, which can be found on many bank sites.


Find your breakeven point
Here’s an example of how a mortgage refinance might play out with a typical 30-year fixed-rate mortgage:

Amount Refinanced:  $200,000
Closing Costs for New Loan:  4% or $8,000
Current Mortgage:  6% or $1,199 per month
New Mortgage:  5% or $1,074 per month
Monthly Savings:  $125

But even though you start paying the lower rate right away, you’ve shelled out $8,000 in closing costs, and you aren’t ahead of the game on your mortgage refinance until you’ve paid that off. At $125 in monthly savings you have to stay in your home 64 months—more than five years—to make it worth it ($125 x 64 months = $8,000). Move before then, and you’ve lost on the deal.

However, if you remain for 10 years, for example, you’ll have saved $7,000.

It gets better
Although 1% is the rule-of-thumb minimum for a mortgage refinance, lower rates can make refinancing even more attractive, as the breakeven period becomes shorter.

Consider the above mortgage refinance scenario if you could shave another half-point:

Amount Refinanced: $200,000
Closing Costs for New Loan: 4% or $8,000
Current Mortgage: 6% or $1,199 per month
New Mortgage: 4.5% or $1,013 per month
Monthly Savings: $186

You now reach the break even point in 3.5 years.

Another way to improve your position
Two additional factors can make a mortgage refinance an even better option:

• Your credit rating has improved since your last mortgage. Go to AnnualCreditReport.com to monitor improvements.
• You’ve started earning more money.

Both these factors make you a more desirable candidate in lenders eyes’ for a mortgage refinance, possibly allowing you to negotiate lower interest rates or lower closing costs, further shortening your breakeven period.

The bottom line is that you shouldn’t seek out a mortgage refinance just because “everyone is doing it.” It needs to make financial sense for you.


Source:  Houselogic  Written by Barbara Eisner Bayer