The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

September 18, 2009

Five things to consider before you Refinance the mortgage

Filed under: Personal Finance — Tags: , , , — thebalancedspreadsheet @ 8:31 am

As mentioned yesterday, I am going to discuss the possibility of refinancing my primary residence. Before I go into the details I first want to discuss the reason to refinance as well as some things to consider before you refinance.

Reason(s) to Refinance-To lower your interest rate is really the only reason to refinance. Lowering your interest rate will obviously cause your payment to decreasing, thus increase cash flow if desired. However, lowering the payment period (IE from a 30 year to a 20 year mortgage) without lowering the interest rate is unnecessary. Instead just pay off the longer term mortgage like the lower term mortgage and you will pay it off in the same time you would without the closing costs.

Things to consider before refinancing:

1. What is my breakeven point? This question could be rephrased as, how many months will it take to recover my closing costs? Since all closing cost are either paid up front at the time of the refinance or rolled into the new mortgage, you will want to know how many months will it be before the lower payments make up for the closing costs. To determine your breakeven point, take your closing costs and divide them by the difference between your old payment and new payment. That number is the number of months it will take you to break even on your refinance.

2. How long are you planning to stay in the house? If you are planning on moving in the next 12-24 months and your breakeven point is 36 months, then it would be unwise to refinance.

3. Am I getting the best rate on the market? Do not simply refinance with your current lender just because you get something in the mail from them offering you a lower rate then what you already had. Check websites like Bankrate and Lending Tree and see if you can get a better rate elsewhere.

4. What kind of loan am I getting? I do not recommend anybody get anything except a fixed rate loan. Especially in the 4.5%-4.75% world we currently live in. Adjustable Rate Mortgage (ARM’s), Interest only, and Balloon Mortgages might offer a lower interest rate initially but are more risky over the long term and can adjust upward. Why not lock in a low interest rate now with mortgage rates at the lowest they have been in 40 years? Another thing to look at it how many points am I paying? Points are simply prepaid interest that is paid at closing. 1 point means that you will pay 1% of the loan value upfront at closing. Points will then lower your rate, but unless the difference in rates is significant (.375-.5%) it might be better for you to pay no points and not prepay the interest.

5. What is my home’s current value? This is important to know before you start the process because due to the housing bubble popping, many homes are now underwater. This makes it virtually impossible to refinance your mortgage unless you can bring a large sum of $$$ to the table at closing to bring the loan amount to what the house is worth.

With rates being as low as they have been in years, now is a great time to refinance. Has anybody got any other suggestions or recommendations to consider before refinancing?

Early next week I will post my analysis on whether or not I should refinance my 6.1% mortgage based on my amortization schedule that I’ve calculated.

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7 Comments »

  1. […] You first might want to first ready my thoughts on why we are paying our mortgage down quickly, why to refinance and the reasoning behind refinancing with a 15 year 4.75% fixed […]

    Pingback by Should I Refinance? Part II-The Final decesion « Thebalancedspreadsheet's Blog — September 24, 2009 @ 8:08 am

  2. […] month.  At our current rate, we will pay the mortgage off on July, 2013.  I have decided against refinancing for now due to the breakeven point being 24 […]

    Pingback by September ‘09 Net Worth update (+7.66%) « Thebalancedspreadsheet's Blog — October 13, 2009 @ 2:35 pm

  3. […] to pay down the mortgage, discussing my families accelerated mortgage amortization schedule, and things to consider before you refinance, I am now finally ready to run a simulation on whether or not to […]

    Pingback by Should I Refinance? 4.375% w/ 1 point v. 4.75% « Thebalancedspreadsheet's Blog — October 16, 2009 @ 11:06 am

  4. […] month.  At our current rate, we will pay the mortgage off on July, 2013.  I have decided against refinancing for now due to the breakeven point being 24 months.  YTD we have almost paid off $20,000 in […]

    Pingback by November ‘09 Net Worth Update (+4.23%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — December 3, 2009 @ 10:51 am

  5. […] month. At our current rate, we will pay the mortgage off on July, 2013. We have decided against refinancing for now due to the breakeven point being 24 months. For 2009 we paid off over $21,000 in […]

    Pingback by December ‘09 Net Worth Update (+4.82%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — January 2, 2010 @ 12:16 pm

  6. […] month. At our current rate, we will pay the mortgage off on July, 2013. We have decided against refinancing for now due to the breakeven point being 24 […]

    Pingback by January ‘10 Net Worth Update (+1.95%) « The Balanced Spreadsheet-Financial News, Advice, tips, and more — February 1, 2010 @ 11:54 am

  7. […] lows most people are rushing to refinance before rates rise again.  There are several things to consider before you refinance and this spreadsheet will help determine two of them. 1.) How much interest you will save if you […]

    Pingback by Refinance Breakeven Spreadsheet « The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice — April 3, 2010 @ 9:10 am


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