When does it make sense to NOT refinance?

As rates begin to drop again, we are beginning to see an increase in the number of calls and inquiries into refinancing. Almost every call starts with the question “What are rates doing?” which is followed up by “Do you think I should refinance now?”

The standard industry response is that if you can drop your current interest rate by more than one percentage point (1%) then it makes sense. Or, if you are paying off debt or wish to take cash out, then it may make sense as well. Lastly, if you can drop Private Mortgage Insurance then absolutely.

Now I won’t attempt to address Cash out Refinance’s or Debt consolidations here because those are unique situations to the borrower. What I hope to do here is answer this question for the layman in as simple a way as possible.

Let’s take a typical borrower and see if we can make some sense of this.

Betty and Bobby Homeowner bought their house 2 years ago for $300,000 and put 5% down. They locked their loan in at 5.500% on a 30 year fixed and have a principal and interest payment of $1618.20 a month.

In our example, rates have dropped to 4.750%. A refinance for Betty and Bobby would drop their payment to $1487.00 a month, a savings of $131.00 a month or $1572.00 a year. So far so good right?

But what does it cost to refinance? Typically it costs 2% of the loan amount. This covers my fees, Title, escrow, inspections, etc. On Bobby and Betty’s loan they are looking at closing costs of approximately $6,000.00. This means that it will take 4 years to recover the cost of refinancing their house.

Now you might say, “well, yeah, but then they are saving money for the next 26 years.”

If they STAYED in the house for 30 years you would be absolutely correct. But statistically, most people move every 7 to 10 years. They also refinance every 3 to 5 years.
(Of course these numbers are skewed from the last several years of mortgage activity)

What this all means is that numbers don’t always tell the whole story and it is up to the homeowner to make sure that they are dealing with an honest and ethical Loan Officer. It is REALLY easy to gloss over the costs of a mortgage, which is part of the reason why we are in this whole housing mess.

How do you find an honest and ethical loan officer? Well, if they are still in business that’s a good sign obviously. Also if they work entirely by referral, that is a great sign, because you can’t screw people and then ask them to refer their friends and family.

I hope this answers the question of when is a good time to refinance. Please feel free to call me or e-mail me if you have any questions. My e-mail address is vince@gomortgagefirst.com