Should you refinance your mortgage?

Most mortgage loan officers would tell you that you should. They will tell you even more so now with mortgage rates coming down. But it is never that easy to answer this question. There are so many variables that go into making the correct decision. However; I will go through the basics.

On the home we would look at the current amount owed including all mortgages on the home and the payments associated with those mortgages. We would also look at the value of the property; it is important to know the equity position on the home.

On the situation we need to look at; how long the homeowner expects to stay in the home and if they need cash for other purposes.

On the borrowers we need to look at debt and credit information and risk tolerance.

You should look at the new rate and the closing costs. Never forget the closing cost.

Almost every call I receive from someone shopping for a mortgage starts with this question from the caller. I answer the phone and they say something like “I am calling around looking to refinance my home and I wanted to know what your rates are.” The reality is that rates are relative. Today you have adds to the rates for credit score, cash out, loan to value, second mortgages, when closing will occur, and loan amounts. So no one can quote you an accurate rate until they have a little information from you.

I heard a radio ad the other day and they quoted 5.5% on a 15 year fixed rate with an APR of 6.187%. Does that sound like a great deal? If you just hear the 5.5% fixed you would think it is an excellent deal. But to get that 5.5% if the APR is 6.127% on a 150,000 mortgage amount would cost $6800 in closing cost. Do you know how long it would take to get your money back on a deal like that? Let’s look at it.

You could get 5.875% on the mortgage with only $325 in closing costs.

The payment at 5.5% would be $1220.04
The payment at 5.875% would be $1249.56 or $29.52 more.

You take the closing cost for the 5.5% of $6800 and subtract out the closing costs from the 5.875% of $325 and you would pay $6475 more in closing cost for the 5.5%.

You then take the cost difference of the 5.5% of 6475 and divide the monthly savings of $29.532 into it or 6475/29.52 which give you 219. 35. The 219.35 is the number of months it takes to receive your money back from the additional cost. Yes it would take 219 months or just over 18 years to get your money back. Since this is a 15 year mortgage you would never recoup your cost. In this case you would want the higher rate with the lower cost.

Always look at the cost compared to the benefit. Since we are talking about money the benefit is almost always in the money.

There is a lot more to this which I will discuss at a later time.