Time To Refinance The Mortgage?

Have you checked out mortgage rates lately?  Wells Fargo has a 30 year fixed rate mortgage at 3.75% and a 15 year fixed rate mortgage at 2.875%!  2.875%!!!!  Are you kidding me?  I’m not saying you should run out and refinance right now but it is worth thinking about.  There are some factors you should consider first.  How long have you had your current mortgage?  How long do you plan to stay in the house?  How long will it take you to recoup the money you spend to refinance the mortgage?  Do you have a prepayment penalty?

There used to be a rule of thumb that said you shouldn’t refinance your home unless you could reduce the interest rate by at least 2%.  Then the rule of thumb changed to a reduction of at least 1%.  Now, the rule of thumb is you should consider refinancing if you will you stay in your home longer than it will take for you to recoup the cost of refinancing.  

If you took out a mortgage in May of 2006 for $200,000 at a rate of 5.5% you would owe $180,766.53 as of July 1^st, 2012.  If you were to refinance the balance of that mortgage today at 3.75% for 30 years your payment would go down $280 (from $1135 to $855).  It would take you approximately 14 months to pay off that refinance. 

Even better, if you took that same mortgage originally taken out in 2006 and refinanced it to a 15 year at 2.875%, your payment would go up $129, up to $1,264.  However, in those 14 months you would have paid $6,016 in interest as opposed to the $12,298!!!  That’s a savings of $6,282, making this refinance well worth the time, effort and initial cost! 

It doesn’t always make sense to refinance.  It may not make sense to refinance if:

• You plan to move within the next few years; a monthly savings of $100 at a cost of $4500 to refinance would not be justified. 

• You are on the backside of your current mortgage.  The majority of the interest paid on your mortgage is paid on the front end.

• You current mortgage has a prepayment penalty. Most prepayment penalties hit you with a penalty of 80% of six months interest (ouch!).  However, most expire after 5 years so check your documents!!

It may make sense to refinance if:

• You can reduce the term of your loan without increasing your payment beyond your means.  For example, you refinance to a 15 year mortgage from a mortgage with 23 years left.

• You could reduce your monthly payment substantially!

• If you are in an Adjustable Rate Mortgage (in that case, stop reading and call your bank to refinance to a fixed rate mortgage right now!)

You might consider going to an extra payment calculator like the one at http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx to determine if you could save yourself interest AND the cost of refinancing by just adding extra money to your payment.  A Do It Yourself refinance without the hassle of refinancing!

I’ve taken the liberty of running some numbers to quickly illustrate how much interest you could save by refinancing: 

• Interest paid on 30 year $200,000 mortgage at 6.00% is $231,676

• Interest paid on 30 year $200,000 mortgage at 5.00% is $186,511

• Interest paid on 30 year $200,000 mortgage at 3.75% is $133,443 

• Interest paid on a 15 year $200,000 mortgage at 2.875% is $46,450

With interest rates as low as they may ever get, take an hour or so to run some numbers.  It may save you tens of thousands of, even hundreds of thousands of dollars!