Should I refinance?

Almost daily, I get asked this question. It is important to keep in mind that simply because rates are lower and your monthly payment would be reduced, a refinance may still not make sense. Here are several initial questions that you need to ask yourself: How long do I plan on owning the home? How quickly will the closing costs be repaid via monthly savings? What impact does lengthening the term of my loan have on overall interest payments? Can I convert current ARM into a fixed product? Can I shorten the life of my loan?

Here is an actual refinance scenario that I recently closed for a client, on a $275,500 loan amount:

Current Payment: Proposed:

P & I: $1,755 P & I: $1,458

Taxes: $79 Taxes: $79

Ins: $184 Ins: $184

Total PITI: $2,018 Total PITI: $1,721

Factors to Consider

•- Monthly savings of $297 ($1,755 - 1,458)

•- Refinance closing costs (not prepaids) of $2,540 --- 8.5 month payback

•- Current pmts remaining on life of loan $1,755 x 330 pmts = $579,150

Vs.

•- Proposed pmts over life of loan $1,458 x 360 pmts = $524,880

•- $54,270 total savings; however, 2.5 years added to loan

For the above scenario, the borrower planned on making this home his retirement home. Therefore, 8.5 months was a very quick payback. If he planned to sell in less than year, a refinance may have not been logical. His prior mortgage was a 30yr fixed rate at 6.5% on a $276,000 loan amount. The new loan was at 4.875% on a 30yr fixed, with a slightly lower loan amount of $275,500. The borrower had owned the home for 2.5 years.

Refinances are still expensive with underwriting, processing, title and appraisal fees. All of which can be rolled into the loan amount so there's not out-of-pocket expenses (presuming sufficient equity), but fees nonetheless to absorb. These fees are ones that I even incur when originating my own personal loans. There are also tax and insurance escrow requirements, but if you do refinance, you would be refunded your current escrow amount after your present loan was paid off. Thus, it's basically awash.

For refinances, borrowers can opt to pay the escrows out-of-pocket or roll them into the loan. Most people pay out-of-pocket to avoid amortizing the amount over 30 years. Like a purchase, the borrower skip's a month's payment on a refinance. Therefore, with the escrow refund and skipping a month's payment, small out-of-pocket monies will be quickly repaid.

Typically, if the refinance payback is 24 months or less, the borrower plans on owning the home for the foreseeable future and the interest rate is reduced by at least 0.5% (pending on the loan amount), a refinance can be worth pursuing.