Just because you can refinance, should you?

Posted by Fred Chamberlin
January 14, 2009

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 Payment Hard Closing Costs*

$457 $341/388** $3,500

Recovery of costs in 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 Payment Hard Closing Costs*

$2,327 $1,911/2,041** $6,000

Recovery of costs in 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 from this group that is in your state for up to date and good information for YOU! FHA Streamline Refinances are almost always a good move. The next question is can you? Check out this post.

FHA Mortgage

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