When Does It Make Sense To Refinance?
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Refinancing your home loan makes sense only if you are able to have a monetary or
security based gain. There are a few basic things you need to know when analyzing the
merits of a refinance.
First you need to know the exact numbers of your existing loan terms.
Some of these items are:
 | Current principal balance |
| Current interest rate |
| Original length of the loan (how many years to pay off) |
| Amount of the principal and interest payment |
You can find this information on your coupon book on the first few pages or on your
monthly statement sent out by your lender. If the information is not in either of these
places, you can find it on the NOTE that you signed in escrow.
The next step would be to call me for the current interest rate at (209) 296-5005.
You also need to know the exact amount of NON-RECURRING closing costs
(costs that are incurred to refinance the loan.) Included in these costs are:
| Appraisal |
| Credit Report |
| Discount Points |
| Origination Fees |
| Processing |
| Underwriting |
| Document Preparation |
| Title Insurance |
| Escrow Fees |
| Notary |
| Recording |
| Courier |
| Statement or demand fees |
RECURRING COSTS include:
| Interest (prepaid and accrued) |
| Property Taxes |
| Homeowners' Insurance |
| Mortgage Insurance |
| Any Impounds for the above recurring costs |
The reason for not including the recurring costs is that these costs are not new. You
would have to eventually pay for these even if you did not refinance.
Here is an EXAMPLE of the process:
| Using a CURRENT loan balance of $150,000 Using the CURRENT interest rate on this loan of
8.5% $150,000 x 8.5% = $12,750 annual interest |
| If the interest rate lowers to 7% and you refinance the non-recurring closing costs
would be approximately $2500 |
Your calculation would look like this:
| Take the loan balance (still $150,000) |
| Use the NEW interest rate of 7% |
| $150,000 x 7% = $10,500 annual interest (proposed) |
| $12,750 annual interest (present) less $10,500 annual interest (proposed) = $2250
savings. |
| $2250 divided by 12 = $187.50 per month. |
| Now you need to take the $2500 in non-recurring closing costs, divide by the monthly
savings of $187.50 and you come up with 13.33. |
| This means that it will take 13.33 months before you break even. |
So you need to ask yourself; will you own the home for more than 13.33 months? If yes,
then you would benefit by refinancing. If no, then you probably should not refinance.
Here again is the formula:
| Current Principal Balance x Current Interest Rate = Current Annual Interest Paid |
| Current Principal Balance x New Interest Rate = New Annual Interest Paid |
| Current Annual Interest less the New Annual Interest = Annual Interest Saved by
Refinancing |
| Annual Interest Saved by Refinancing Divided by 12 (months) = Monthly Interest Saved |
| Non-Recurring Closing Costs Divided by Monthly Interest Saved = the Number of Months to
break even |
The above example is based on refinancing a fixed rate loan to a fixed rate loan. If
you have an adjustable rate mortgage, the reason to refinance may have more to do with the
security of changing to a fixed rate than just interest savings. |
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