Hello and welcome to this week’s Moorings Column, your source for all things in the mortgage and housing industry. To refinance or not to refinance, that is our question for this week. Well to start off with let’s look at some numbers.
Now for sake of example let’s say you currently have a home loan of 6.25% with a balance of $417,000 and your home is worth around $700,000. Assuming you have a credit score of 740+, provable assets and acceptable income, you could expect to do a rate-term refinance (meaning your not taking equity out, only reducing your rate) and get your interest rate down to about 5.25% with 0 points and 0 origination fee. Closing costs will run about $2150.
You are currently paying $2,171.88 per month on your 6.25% mortgage. By refinancing you can reduce your payment to $1,824.38, a monthly savings of $347.50. Saving that much per month means that in 6.5 months you will have paid for the cost of the refinance and therefore then begin to move into saving real money each month. Saving $347.50 a month is $4170 a year or $125,000 over the life of the loan! And that’s how the ‘mystery’ of ‘when is it a good time to refinance’ works. Simply divide the closing costs by the monthly savings and see how long it will take you to recoup closing costs. Then you have to ask yourself the question “How long do I plan on staying in this home?” If the answer is that you will be there longer than it will take to recoup the closing costs, then you owe it to yourself to take advantage of the best rates in history, even if they have increased by half a percentage from their lows this spring. And don’t be under the Pollyannaish fantasy that they will go back down again. There was a Perfect Storm that happened to get them to the levels they hit and that won’t happen again. There are inflationary pressures caused by oversupply of Government Lending that will keep rates moving up.
While reducing your rate is great, taking equity out of your home is sometimes necessary. Let’s say little Johnny who graduated high school this spring is about to head off to college. You need some money to help defer the expense of sending him and thankfully have some equity in your home. Based on 5.25% 30 year fixed rates it will cost you an additional monthly payment of $218.75 a month. That is the cheapest borrowing you will ever do!