I just wanted to address Amanda’s comment on my last post about refinancing really quickly. I think there’s going to be a lot of people wondering about refinancing right now with rates as low as they are.
Basically, what you want to find out is whether it will cost you less money to refinance, or to stay with your higher rate. The bank will charge you some fees (loan origination, etc) to refinance your loan, even though they may roll those fees into your new loan. So even though you might not be out of pocket any cash at the time that you refi, you will owe more money on your loan that will have to be paid off when you sell (or after the life of your loan). So you want to find out how much lower your mortgage payment per month will be with the lower rate, and then how much the closing costs (bank fees) will total. Then divide the closing costs by the monthly difference and find out how long it will take you to recoup that loss. If you plan to stay in the house much longer than it will take you to make the refi costs up, then go ahead and refinance.
Here’s an example:
You owe $100,000 on your loan and your current interest rate is 7.5%. Your monthly payment is $700. You can refinance for a rate of 5.5% and your new payment will be $568 a month for a difference of $132 a month (wow!). Your closing costs are $2500, so it will take you 19 months, or just over a year and a half to recoup the loss. If you plan to stay in your house another five years, this would obviously be a smart move.
There can be more complicating factors, such as, if you bought in 2005 and put little or no money down and now you owe more than your house can be sold for. A bank would most likely not be willing to refinance you in this case (it would be an extremely high risk loan for them). Or, if you bought in 2002 and have lots of equity in your home, but are still paying PMI (private mortgage insurance, which is an extra monthly fee you pay to help insure the mortgage company against your defaulting on the loan if you haven’t put down at least 20%), then you could be eligible to have that PMI removed from your payment, which would save you even more.
The point is, when to refinance isn’t always crystal clear, but lower interest rates often signal a time when researching the right option for you is smart. So if you want more information, email me or contact a mortgage representative.