When is refinancing your mortgage worth it? (PMI, loan, interest rate)

[svillechris]

I bought my house in mid 2009 with a 5.5% mortgage rate. I'm getting a ton of offers through the mail saying I could refi to under 4%. Is that something to pursue? Or is it not enough of a decrease in interest rates to make it worthwhile?

[djmilf]

I was told years ago by some one much smarter than me that the rule of thumb is to compare how much you'll save on interest payments versus how much you'll pay in processing fees and associated costs for the new mortgage.

If you save $100 per month in interest by refinancing, but it costs you $3000 to re-finance, then your payback doesn't occur for 30 months, or 2.5 years. You don't actually save money until 2.5 years later. If you save $100 per month in interest, but the total cost is $1500, then the break-even point is 15 months after re-fi.

A question you need to ask yourself is how much longer you plan to keep the mortgage and whether you believe that mortgage interest rates will rise or fall in the short term. Don't refi if you are planning on moving this year.

Also, if you think that mortgage rates are headed down in the near term, plan your mortgage refinance to capture that expected low rate.

[shaker281]

Djmilf is on the money. You need to compare the total cost of the refi process with the amount you will save on interest and determine your break even point. Don't forget to figure in the mortgage interest tax deduction. And how long you will be there is a big factor.

The best APR (includes upfront costs) I see on Bankrate.com is 4.28% (4.125% with $1920 in fees). You could save $976 a year for every 100K you owe, assuming a 20% tax rate. Might be worth it!

[svillechris]

thanks for the help. So I still owe about 200k on it (only 16 months into the loan) on a 30 yr fixed. If I could then save over $1800/yr on it, that seems worthwhile. What is the common refinance costs? I was thinking $1500-2k? If that was the case, I would pay off that cost in 1 year basically and have the remaining 28 years of my loan paying $1800 less per year.

[slackjaw]

Refinance costs can vary widely depending on how the loan is structured, but I suspect this will be a no-brainer if you can recoup almost 2k a year and have no plans to move.

Good luck!

[LeavingMA]

It also depends on how much you owe on your loan and how many years left. In most cases if you owe less than $100,000 and have less than 10 years it isn't worth it. Closing costs differ from bank to bank. For the lowest rate I would recommend going through a credit union if you have a good one around you. Also, if you find a lower rate at another bank many credit unions will match the rate.

[slackjaw]

He's got 200k and 28.67 years left on a 30 yr fixed.

[Ariadne22]

Absolutely do the refinance. A 1.5% drop in rate is very significant and will enable you build equity faster. Try to find a local lender that will not rip you off on closing costs and will keep your loan in their portfolio. Also, if you can arrange for a loan modification through your existing lender instead of a whole new refi, you will also save the closing costs. But, if the mortgage was sold, that will be harder to do.

I have never in my life paid the closing costs being paid by people who arrange loans through brokers which are then sold in the secondary mortgage market. Those mortgage brokers rip you off big time.

Make some calls to your local credit unions as mentioned above and other smaller local savings and loans or banks. They are so much cheaper. All those points and legal fees are just plain robbery. You're better off paying a slightly higher interest rate and low closing costs, especially if you've a local lender who will portfolio the loan. Also, add the cost of the refi to the mortgage balance - that way you won't need to come up with any cash.

Of course don't fall for the 'add to the mortgage balance' and then get stuck w/huge closing costs. I actually had one fool talk to me about a refi who labeled the $8,000 closing costs as 'junk fees' hoping I, too, would think of $8,000 as junk money.

[evilnewbie]

Problem is those less than 4% offers are probably not really that rate... I be willing to bet those mailings are just to get people calling... then oh, its only 4.5% with 1 point + closing costs.... The way I see it, if they have to mail me ads about refinancing, its a scam... if I initiate by actually looking for companies, I would be in a better position to get the best rates which are the REAL rates... not some lies on a printed piece of paper...

[svillechris]

thanks so much for your help everyone. I didn't realize that refinancing down just 1.5% or so could make this big of a difference. It's crazy, at 5.5% back in May of 2009 I thought I was getting rock bottom rates, when they've plummetted even further in the 12-16 months.

2 more questions:

1 - With the Fed's expected QE2 to be announced in their November meeting which will include the purchasing of hundreds of billions more of MBSs, how much more do you think this will drive down mortgage rates?

2 - I actually did my mortgage through the HUD program and only put 3.5% down and have to pay PMI. I also think rates were closer to 5% or so at the time I signed on, but I got 5.5%, presumably because of my higher risk (from the lower down payment), which I thought was reasonable. So my question is, if current rates right now are 4.28% (as displayed in the 3rd post on this thread via BankRate), would I, as a member of the HUD program, not qualify for that rate? Would mine probably be more in the 4.5-4.75% range do you think?

Thanks again!