When Should I Refinance?

Most home owners will refinance to save money month-to-month, but with interest rates being slashed in recent months and holding steady at the lowest rates in 30 years, many are refinancing to save money long-term. Regardless of your reasoning, you need to do the math before you trade in one home loan for another. If it's not right for you, you could wind up wasting time and in some cases spending more money. Here's what you've got to consider:

Add up all of the costs, which could include points and fees for the application, loan origination, appraisal, attorney, credit report, extra insurance, inspections, and others. There are costs associated with any new loan. Working with American Mortgage Consultants, we prefer that you know these costs before making your decision.

Figure your monthly savings by subtracting your current monthly payment from your refinanced mortgage monthly payment. In some cases, your monthly savings can be very good. In others, it may be very little savings.

Multiply your monthly savings by your combined state and federal tax rate. There are tax advantages attached to your mortgage and when your payments are reduced through refinancing, you will have additional tax costs. However, these should be very small compared to the savings.

Take the amount that you saved in monthly costs for the loan and subtract the additional tax costs. This will tell you your total savings. Be sure to divide the tax by 12 months so that you get an accurate picture of the monthly savings.

Divide your total costs by your net savings to determine how many months it will take to pay off the cost of refinancing. For example, if you will save $100 per month on the refinanced loan and the refinanced mortgage costs you $2,500, it would take you just over two years to break even and start enjoying the savings. If you plan to move and sell the home within those two years, this might not be the right time to refinance. Each situation should be examined thoroughly to ensure you are truly saving money.

If your current loan contract includes a prepayment penalty, you've got to factor it in too. Some penalties can be as high as six months interest on 80 percent of your balance, but diminish the longer you hold the loan.

The points vs. interest rate also presents a need to do the math. Generally, lower points produce a higher interest rate. Higher interest rates mean lower points. If you know that you will stay in your home for a few years, a zero-point loan option would likely be a better deal because you may not have the opportunity to recoup those costs. If you are staying in your home for an extended period of time, you will have time to cash in on lower rates even with the points.

Watch out for some no point loans. They can be useful if you are cash poor at the time of the loan, but in addition to the higher interest rate, some come with prepayment penalties that kick in if you refinance again too soon.

To get to the bottom line on whether refinancing is right for you and your situation, give us a call. We'll take you through the numbers, tell you what options are available to you, and build a custom rate quote for you.