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I was told in the past that refinancing is not a good idea unless you plan to stay in your home for at least 7 years afterward. Recently, I read an article that stated approximately 2 years to recover fees, etc.? Has the recommended time changed?
As Smash said...depends on your current situation. Anytime you refinance you need to look at breakeven point. Take the total closing costs and divide by monthly savings.. For example, if it costs $4000 but you save $200 per month, your breakeven point is 20 months.
Even if staying in a home a short period of time, you can always look into a no cost refinance where the lender covers all your costs and you roll nothing into the new loan. As of friday, full cost refinances where around 3.875%...but you could also do a refinance to 4.5% and pay no costs. So if paying no costs, even if you are only staying in home for 6 months, it would make sense.
This is a parallel to the "don't refi unless you can drop a full point in rate" school of thought. These are antiquated ideas. They were put out there when the public did not have either the resources- like CD- or the knowledge to drill down into the details and make an educated personal decision.
The decision is made by using an objective calcualtion:
Closing costs/ monthly savings= months to recoup invetsment
My general rule for clients is 150%- if you can say that your plan is to be own the home for 150% of the time that it takes to reoup the investment then it is a good idea. Notice I said own not live in as people do retain a former primary residence as an investment property when they move up in say 4-8 years.
Closing costs are all fees except: interim interest and escrow account deposit.
Not sure what 3rd party fees there are in Florida but here in NC they are some of the lowest in the country so covering all closing costs through a slightly higher rate is always an option here and this is how to evaluate it:
Current loan is say $1500 a month
Proposed loan 1 with lender paying closing costs: $1400
Proposed loan 2 with $1250 in closing costs: $1365
When doping your evaluation you do it between the proposed loans against each other and not against your current loan. You can have the $1400 payment without closing costs and the recoup time is 0 months. For your $1250 investment in fees you are saving $35 per month not $135.
Than decide later in another year/year and a half.
Why?
Because the Feds have already announced they aren't going to be rates till "summer 2013"
That means interest rates aren't going up anytime within the next 18 months.
So take the no cost option (even if you plan on selling).
You hedge your bets either way and aren't committing yourself to the expenses of any added closing costs.
My sister did a no cost refinance 3.5% 15 years. (regular refinance)
I don't know if i am moving myself. So Wells Fargo offered me a no cost loan at the same rates (3.5% 15 years HARP no cost) or 4.125% 30 years HARP. Even though I put 25% down in Lake Mar in 2009y. Home prices still going down so my value of my home has gone down 15-20%. Thats how scary home prices are still going down. Because I have a home that was more than $500k and homes over $400k aren't moving wells unless they are short sells or foreclosures and that's what's still dropping prices.
Anyways. That's the option you should take. The no cost option is the best option if you aren't sure how long you will own the home.
You can always refinance after 12 months with most mortgage refinances.
Starting next month with my new refinance (I went from 4.875 to 4.125). I am Saving $300 a month. But I am prepaying. $500 extra into the principal each month anyways so this will still help me.
Say if I wait 6 months longer and lock in at 3.875%. I would have lost $1800 in saving by waiting 6 more months. It would take close to another 20-24 months to make up that's difference by waiting to see if I get a lower rate.
It is alos my understanding that you pay the bulk of the interest upfront. Therefore, won't you be paying just as much if not more in the beginning of the loan being I'm already 8 years into it?
It is alos my understanding that you pay the bulk of the interest upfront. Therefore, won't you be paying just as much if not more in the beginning of the loan being I'm already 8 years into it?
Yes and no. It really depends how you approach the refinance. And I had a long discussion with my sister who took the 15 year route.
If you refinance to another 30 years, you obviously reset the loan to 30 years. That's the part you are thinking about. Paying more interest by resetting the loan.
However if you applied the "savings" from the refinance and apply the savings into the principal each month, you will get the mortgage paid off much sooner than 30 years (or at least pay down the principal faster) if you plan on refinancing down the road or selling
Now if you just stick to the lower monthly mortgage payment and start the 30 year payment without paying into the principal than you will end up paying more interest at the beginning.
So you have to stick to a plan of using that added savings to pay down the principal. However probably 90% of people who refinance do not take the same approach as I am doing.
I am saving $300 a month from refinance. That $300 savings I will apply straight to the principal directly.
Wanted to add. After refinancing the bank told me to skip this months payment and start new payments next months.
But again the mistake people make is that "skipping one month" isn't a great thing banks are doing for you. Since mortgages are paid in arrears. This "skipped payments interest" is added to the principal.
So I am double paying next month to make up for the skipped payment to pay off the interest that was added by this skipped payment.
Again many people won't do this. You just have to use common sense when figuring things out.
If I knew I was staying for the next 5 years I would have gone the 15 year no cost 3.5% route. But I don't know where I will be.
I will probably end up renting the home out since rental rates are close to $100 per sqaure foot right now and I would be in positive cash flow with renting than taking another huge loss.
If I rented it out with a 15 year mortgage than I could be losing a little bit of money by the higher mortgage and I can't write off rental losses because I make too much money.
It is alos my understanding that you pay the bulk of the interest upfront. Therefore, won't you be paying just as much if not more in the beginning of the loan being I'm already 8 years into it?
Put your numbers in an amortization schedule and find out.
Even though people generally think there are many inputs that can't be objectively evaluated- there really aren't.
Put your numbers in an amortization schedule and find out.
Even though people generally think there are many inputs that can't be objectively evaluated- there really aren't.
I did that one and it laid it all out. Since I have 22 years left, I would pay about an extra $ 54K in interest at 5.8%, if I leave it the way it is. If I switch to a 15 yr mortgage at 3.5%, I would pay about $20K in interest.
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