How To Tell If It’s Time To Refinance Your Home Loan
To determine whether you should consider refinancing your home loan, you can compare the costs of getting a new mortgage with the savings you would get from a reduced interest rate.
You may also want to consider refinancing to a different type of mortgage, such as switching from a 5-year balloon to a 15-year fixed rate mortgage.
Here is an example and a work sheet that will help you determine if refinancing makes sense for you. You may want to print this article and use the worksheets.
Refinancing Example
Rick and Carol have a home they bought three years ago for $300,000 and they have five years remaining on balloon mortgage of $200,000 with an interest rate of 4.25 percent.
Their monthly payments are $983.88.
They intend to live in their home for several years and would like to lock in a 30-year mortgage with a 3.5 percent fixed rate.
| Rick and Carol |
|---|
| New Mortgage Costs | |
|---|---|
| Discount Points (in $) | $ – |
| Origination Points (if any) | $ 1500 |
| Application Fee | $ 475 |
| Credit Check Fee | $ – |
| Attorney Fees (yours) | $ – |
| Attorney Fees (lender’s) | $ – |
| Title Search Fee | $ – |
| Title Insurance Fee | $ – |
| Appraisal Fee | $ – |
| Inspections | $ – |
| Local Fees (taxes, transfers) | $ – |
| Other Fees | $ 360 |
| Total cost of new mortgage | $ 2335 |
| Calculating the Savings | |
|---|---|
| Monthly payment on current mortgage | $ 983.88 |
| Monthly payment on new mortgage | $ 898.09 |
| Difference between two mortgage payments | $ 85.79 |
| Divide total fees on new mortgage by monthly savings – This is the number of months to recover your costs | 27 months |
In this example, Rick and Carol would save almost $1,030 annually in mortgage payments and lock in a 30-year fixed rate mortgage. Over the course of the mortgage they would pay about $31,000 less in total interest.
| Work Sheet for You to Use |
|---|
| New Mortgage Costs | |
|---|---|
| Discount Points (in $) | $ |
| Origination Points (if any) | $ |
| Application Fee | $ |
| Credit Check Fee | $ |
| Attorney Fees (yours) | $ |
| Attorney Fees (lender’s) | $ |
| Title Search Fee | $ |
| Insurance Fee | $ |
| Appraisal Fee | $ |
| Inspections | $ |
| Local Fees (taxes, transfers) | $ |
| Other Fees | $ |
| Total Cost of New Mortgage | $ |
| Calculating your Savings | |
|---|---|
| Monthly payment on current mortgage | |
| Monthly payment on new mortgage | $ |
| Difference between two mortgage payments | $ |
| Divide total fees on new mortgage by monthly savings – This is the munber of months to recover your costs | $ |
Other Considerations
When you’re thinking of refinancing, you may also wish to consider refinancing a larger or smaller amount than the current balance of your mortgage.
If you have excess funds available and believe you will have a hard time earning a return from your investments that’s greater than the mortgage rate you’re paying, you may want to pay down your mortgage and get a new mortgage that is smaller.
If you need cash for other things, like college tuition or a new car, you may want to refinance a larger amount to cash out some of the equity in your home. Remember that mortgage interest may be tax deductible if you itemize your deductions on your tax return. Consult your tax adviser to see how this may apply to your situation.
Final Thoughts
No interest rate environment lasts forever. Unfortunately there is no crystal ball that will tell you when rates have reached their lowest level.
Take action now to evaluate whether refinancing makes economic sense. Evaluating the type of mortgage you want, can help you be in control of one of your largest household expenses.
A good loan officer can show you several refinance options. Contact me if you need a referral.
