RebelCapitalist: Financial Information for the Rest of Us

Is it Time to Refinance?

Mar 26, 2009 | By: Mr_Blue | Tags: mortgage, refinance

Home mortgage rates are trending downward. A quick check this morning of Bankrate.com showed that the national average of a 30-year fixed rate mortgage was 5.08%. We are talking a 50 year low with mortgage rates. Now may be the time to refinance your existing mortgage especially if you an adjustable rate mortgage.

The best place to start is with your current mortgage lender. They may be willing to work with you since they don’t want to lose your business and especially if you have been a good borrower. Next, place to look is a local credit union. You will have to join the credit union by becoming a depositor but it may be worth it. Credit unions are less likely to charge loan points and high closing costs. The other option is to try a reputable mortgage broker (I can’t stress reputable enough). Mortgage brokers should shop around for the best deal for you but make sure you do your homework before you start using a mortgage broker.

Is it worth refinancing? The answer to this question depends on how much monthly savings (in terms of monthly mortgage payments) you achieve with the new mortgage loan compared to the old mortgage loan. Also, the other factors are the loan points and closing costs of the new mortgage loan. Another factor maybe how long did you intend to stay in the house because if you were paying points and high closing costs on a new mortgage but were selling the house in less than 2 years it may not be worth refinancing. For instance, if you are saving $200/month with the new mortgage payment and your paying 2 points on a $200,000 plus $400 in closing costs for a total of $4,400 in loan costs. It would take you 22 months ($4400/$200) to recoup those loan costs in terms of the monthly savings achieved with the new mortgage loan. So, if you are selling within 22 months it may not be worth refinancing.

Make sure you understand all of the terms of the loan particularly loan points and closing fees. Loan points refer to “percentage points”. For example, one point would be 1% of the loan amount that borrower would have to pay to lender. In theory, the more points you pay upfront the lower the mortgage rate over the life of the loan. Closing fees may cover lender’s administrative costs, recording fees and title insurance costs.

Good luck.