Question: Is it true that it is not really worth refinancing a 30-year mortgage unless it is to go down two (2) full points of interest?
Question: At what point is it worth it to refinance a mortgage? We have a 30-year fixed rate of 5.75 percent. We have good credit and would love to reduce our monthly payment. But will the fees and hassle outweigh the cost benefit?
Question: I am in the market looking to move into a larger house. I haven’t found anything I like at this point, but mortgage rates are low enough that I could refi and save some money. If I refinance now, and then want to purchase a home down the road, am I hurting my chances for getting that mortgage?

Warren Whitaker: As you notice, I am combining these 3 questions with one answer.  First of all, let’s forget “Rules of Thumb” and smash the “Rules” with a hammer.  The fast answer for all three is that when it makes FINANCIAL sense to refinance, that’s when you pull the trigger.  And let’s forget those old rules of thumb that say you shouldn’t refinance unless the rate has dropped by a certain percentage. To figure out whether it’s in your best interest to refinance, you need to calculate your break-even point.

The break-even point is the time it takes to make up in monthly savings what you paid in fees. You calculate it by dividing the mortgage fees by the monthly savings. For example, let’s say you would save $150 a month by refinancing, and the closing costs would be $3,500. Your break-even point is 24 months from now: the $3,500 in fees divided by the $150 a month in savings. (Or use this mortgage calculator.)

In this case, if you expect to continue living in the house for more than tw years, you’ll save money in the long run by refinancing. If you plan to sell the house before then, it’s probably best to stick with the mortgage you have.

How do you figure your monthly savings? You’ll have to get an estimate of the rate for which you’ll qualify. Your interest rate will depend on current interest rate market conditions, your credit score, buy-down points, your current loan amount and your home value. This is something we discuss in a 5 minute conversation to help you determine which direction to go.  We will review your current principal and interest payment, or you can use a mortgage calculator on my web site (www.planomortgageguy.com) to determine what your principal and interest would be with the new loan. Look at your current payment coupon to find out what your current monthly principal and interest are. Now you can figure out how much you would save every month.

You don’t have to start over with a 30-year payment plan, by the way. Let’s say you got a 30-year fixed three years ago, and you want to refinance now, but still pay off the loan 27 years from now. Today, we are see customers taking advantage of the lower rates AND shorter terms.  Remember, the SHORTER the term, the LOWER the rate. Trying to compare a new 20 year loan payment  to your existing 30 year will not make sense, since the terms are obviously different.  Where you see the savings is in the amount of interest that is NOT paid over the life of the shorter loan.  Use this calculator to determine the amount of interest you will save by going to a shorter term – often times, the savings is in the tens of thousands of dollars   If you refinance now, it probably won’t hurt your chances of getting a mortgage a few months or years from now. Make sure your new loan doesn’t have a prepayment penalty, and let the broker or loan officer know what your plans are.

Resources

Does it make sense to refi?

Refinancing Your Mortgage: Is it Worthwhile?

Refinancing After 50: When Does It Make Sense?

Mortgage Rates – Does Refinancing Home Make Sense

Should You Refinance? When it Makes Sense

Leave a Reply

%d bloggers like this: