To Refinance or Not To Refinance? That is the Question
January 18, 2009 in mortgage, refinance
Over my years in the mortgage industry I have seen a lot of things that I question. A lot of those questions are based on what the title of this article states. Typically, if you have a fixed interest rate, what sense does it make to refinance that rate to attempt to get it lower. Going from a 5% to 4.5% really is not going to make it enough difference to offset the cost of the loan.
Fred Chamberlin makes a good post out of this topic and if you have yet to read his, you need to.
Via Fred Chamberlin – Eugene/Springfield’s #1 Experienced FHA Mortgage Consultant:
Retweet this postI have been thinking for sometime about refinances. I have been hoping that rates would drop enough that it made sense for some of my clients to refinance both so it would increase my business but also so it would put them into a better financial situation. To be real honest and boastful, I did such a good job the first time, fewer people needed a lower rate because they were already in a darn good interest rate. So, what I did was put together a couple of scenarios of different type of refinances. I originally posted this on MyFHAMortgageBlog. I hope it answers some questions for you.
Mortgage interest rates have dropped dramatically and are current at or near a 27 year low. That means you can save money on your mortgage payment every month, right? Well, the definitive answer to that is, MAYBE! Just because you can get a lower interest rate, doesn’t mean it is in your best interest to do so. Whether it is a conventional refinance or an FHA or VA refinance, a lot depends on what you have now and what you expect to accomplish.
The easiest way to show this is to give a couple of fictional examples. (These are conventional loan examples) First of all, let’s consider that your have a high interest rate on a small loan. For this example, assume you owe $60,000 on a home worth $200,000 and are paying 7.5% on a 30 year loan and are 7 years into the loan. Would a refinance at 5%*** be worthwhile? Conventional wisdom is that if you are saving 2% or more, it is a good move. Let’s take a look:
Current Payment—-Proposed Pmnt Hard—- Cls Costs*
$457————– $341/$388** —————$3,500
Recovery of costs in approx. 69 months.
So, if you are going to be in your home for at almost 6 more years, this makes sense. If you are going to be there less time, it doesn’t and if you are not sure, it probably is a bad move for you.
Now, how about a different scenario? Assume you have a mortgage of $350,000 at 6.5% with 26 years remaining on a home value of $450,000.
Current Payment—–Proposed Pmnt——Hard Cls Costs*
$2,327——— $1,911/$2,041** ———-$6,000
Recovery of costs in approx. 21 months.
So here, you can see that a 1.5% change can more than pay for itself in less than two years. The interesting thing is that the 2% rule really doesn’t apply in either case. In one case 2.5% is not enough and in another 1.5% is.
* Cost associated with loan, doesn’t include prepaid expenses.
** New 30 Year mortgage payment/Payment to maintain current pay off schedule
***Used only for comparison purposes, not an offer.
These are just two examples. Every loan is different. There are no hard and fast rules. An FHA cash out refinance might be the best thing for you. If you use your home to pay off credit cards, what are your plans? Not doing anything might be the best thing for you. If you have a second on your home currently and it wasn’t used to purchase the home, to pay it off would make it a cash out refinance. They are priced differently.
There are a lot of other things to consider when thinking about a refinance. Are you looking to pay other items off? What is my loan to value? What is my credit score? The way to find out if a refinance is the right thing to do is to talk to a professional in the business. I am always available to answer your questions regarding refinancing or purchase. Rates are great, but that isn’t the only thing to be concerned with when considering a mortgage loan. Is it right for you? Should I put more down or borrow more? FHA/VA/USDA loans may be the way to go instead of conventional. FHA allows cash out refinancing up to 95% loan to value. VA cash out refinances are available up to 100%. USDA doesn’t do refinances but has purchase money available up to the appraised value even if it is over the purchase price. Check with someone you trust for up to date and good information for YOU! FHA Streamline Refinances and VA IRRRLs are almost always a good move.
Lin said on January 19, 2009
Lin’s last blog post..The Pink Pearl
Danny Thornton said on January 19, 2009
Carol said on January 21, 2009
Carol’s last blog post..This was Logging in Washington State
Danny Thornton said on January 21, 2009
A visitor said on January 22, 2009
Danny Thornton said on January 22, 2009
The idea of this post is not to deter people from refinancing, but instead, to get them to think of what their goals are in doing a refinance.
In the case of a 1% drop or greater, refinance is almost always the better road to take. In your case, being able to decrease your loan amount by $20k and decrease your term from a 28 year term to a 15 year term is a great advantage.
As for the savings, it breaks down to a lifetime savings of $128,719.32 that you will save over the life of the loan should you choose not to refinance any more.