To Refinance or Not To? That is the question.

To Refinance or Not To? That is the question.

By Jason, Feb 23 in Blog with 0 comments

“Should I refinance the mortgage on my house?”

That is a very common question that I hear from my clients in Eustis, Tavares, and Mount Dora.  The basic answer is: “If you can save money, then yes you should.”

BUT…

To arrive at the conclusion that you will actually save money, you will have to look at a couple things:

  1. How much will it cost to get the loan? EVERY loan costs something. If all other factors are equal, the loan with the lowest fees would be best. (The “No-Cost” mortgages you hear about are a crock. No, you aren’t paying anything up front, but to compensate you will pay a higher rate. So, there certainly IS a cost for the loan!)
  2. How much lower will the payments be on the new loan? If you currently have a 30 year, fixed-rate loan for $300,000 @ 7.00% your monthly principle and interest would be $1996. If you could get a new rate of 6.00%, your monthly payment would drop to $1799; while 5.00% would be $1610.

Now, take the cost of the new loan and divide it by the amount of money you will save each month. This figure shows how long it will take before you REALLY start saving money with the new mortgage.

For example:

  • If the loan costs $3500 and your payment drops $250 per month, it will be 14months before the cost of the loan was paid by the savings. In mortgage terms, this is a relatively short time. In this case, a refinance would make sense.
  • However,if your payment drops $50 per month it would take 70 months (nearly 6 years) before the refinance was paid off. Will you still be in the home or in it for that much longer?  If not, then there is no reason to refinance the loan.
Another reason to refinance is to turn an adjustable rate mortgage (ARM) into a fixed rate mortgage.  The interest rate on some ARMs can increase as much as 6% above the initial rate at its first adjustment!  Imagine starting at 5%, and then at an adjustment you find the rate went up to 11%!  If you want to avoid that possibility, refinancing to a fixed rate loan (even if it is at a slightly higher rate) would ensure that you no longer have that risk.  (BTW, with ARMs you should always prepare for the worst – that way you will never be caught off guard.)
Once we determine what rate you qualify for, we can quickly determine whether or not refinancing is the best option for you to.

And as always, please feel free to contact us with any questions or concerns that you may have.


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