Don’t get me wrong… I am not saying do not refinance your mortgage. You absolutely should refinance if you can get a rate that is lower than your current rate. What I am saying is that it usually does not make sense to pay for refinancing.
You have probably seen plenty of ads with no cost refinancing. Even if the lender does not charge any fee, costs of refinancing a mortgage can quickly add up to a couple of thousand dollars. These costs include non lender fees like settlement fee, title insurance fee, appraisal fee, etc.
As interest rates have come down, I have been wondering over the past few weeks whether to refinance or not. I am considering doing what I have done twice in the past.
Most mortgage companies and brokers are willing to offer you a mortgage with a slightly higher interest rate (usually around 12.5 basis points) and in return they agree to pay for all the costs for refinancing. Last year, I refinanced my principal of $320,000 down from a 6.5% mortgage to a 6.125%. I could have gotten a rate of 6.0% if I had paid all the fees. However I opted for a rate of 6.125% and made the lender pay $2,200 to cover all refinancing costs.
Here is how the math worked for me. My monthly principal and interest on my original loan of $320,000 at 6.5% 30 year fixed mortgage was $2,022.62. By refinancing to a 6.125% rate, I was able to bring the monthly payment down to $1,944.35 a savings of $78.27 a month or $939.24 a year. If I had chosen the 6.0% rate, the monthly payment would have been $1918.56, an additional savings of $25.79 a month or $309.48 a year. To recover the refinancing cost of $2200 it would take me 85 months or roughly 7 years. I am not sure if we will be in house for that long. Besides the interest rates could come down again within that time, tempting me to refinance once more. Hence it made a lot of sense for me to pay an extra 0.125% or $25.79 a month and save $2,200 on costs of refinancing.
Also when I refinanced, I used http://www.lendingtree.com/ that gave me around 40,000 frequent flyer miles which paid for one of our air tickets during our recent vacation.
As I refinance, I have always made sure that I do not extend the term of the loan. My original mortgage that I took out a year and half ago had a 30 year term. As I refinanced last December, I have calculated what the monthly payments would be for a 29.5 year loan and hold myself to that payment. I also avoid offers that have prepayment penalties on the loan that prevent me from making extra payments towards the house.
I am looking at http://www.bankrate.com/ and it shows 30 year fixed to be at 5.74%. May be it is time for me to explore refinancing again.
Here is a spreadsheet that I have used to calculate monthly payments. There are plenty of calculators available on line but this is useful for the excel lovers.
http://mtgoyal.googlepages.com/MonthlyPaymentcalculator.xls
Leave a comment or contact Tarun at: tgoyal@hotmail.com
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4 comments:
So if you were sure you'd stay in the house for more than 7 years, would you have refinanced at 6.0%?
If I were sure that I would live in the house for 7 years, I might still not take the 6% offer. There is a high likelyhood that interest rates would move down within the next 7 year period. If I was certain that I would not refinance and I would stay in the house for 7 years, I would take the 6.0%. However it is very hard to forecast the next 7 years. Hence I will take the savings that I get now.
Very enlightening article, leaves me wanting to get in on the refinancing action.
I just purchased my home a few months ago. How soon can I refinance and is there a limit (or repercussions) to the number of times I can do it in say a given year?
Before you refinance, please make sure that there is no pre-payment penalty on your existing loan. If there is one, you need to take that into account in your refinancing decision.
Also a mortgage application also counts as an inquiry against your credit report and doing this very frequently can impact your credit score.
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