When Does It Make Sense to Refinance?

Here's a piece from the Wall Street Journal that addresses the issue of when it makes sense to refinance your mortgage. Their answer:

If you are planning to move or even pay off your loan within the next few years, refinancing probably makes little sense because you won't be paying monthly bills long enough for the savings to cover the costs.

If you plan to stay in your home for years, and you are currently in an adjustable-rate mortgage, you should strongly consider a refi. ARMs are incredibly dangerous. Refinancing into a 30-year fixed-rate loan may not cut your current monthly payments by much, but it gets rid of the risk that those payments will suddenly skyrocket.

Refinancing also usually makes sense if you are currently paying a much higher rate, though few homeowners are any more.

As a rule of thumb, Greg McBride, economist at Bankrate.com, looks for a payback period of a couple of years. "Generally, if you can earn the costs back within two to three years, and it's a home you're prepared to stay in for much longer than that, it's usually a good thing," he says. But if the savings are more marginal, you need to do the math.

This isn't an issue we're dealing with since we haven't had a mortgage in over a decade, but I know many people are grappling with this topic. In fact, one of the guys in our office is going through this process now -- should he refinance, if so, where's the best rate, etc.

How about you? Anyone out there going through the decision-making process regarding refinancing?

Comments

[Pat M]

I'm currently just waiting on the rates to dip a bit again and then I'll take the plunge. I'm almost 5 years into my original 5.9% fixed-rate mortgage right now so if I can get a 30 year fixed in the neighborhood of 4.5 to 4.75, I'd be thrilled.

I decided to go for another 30 year rate mortgage instead of a 15 year due to some home improvements I want to do along the way. Also with the uncertainty and instability of employment in general right now, I'd like to have that cushion there as a precautionary buffer.

So while I'm sold on the idea of a 30 year note, I'm a bit uneasy about the forecast for the rates. I've checked a few sites and seen that most industry experts do expect rates to decline slightly in the next 30 days, but there's no guarantee. I'd hate to miss the boat completely. The financial repercussions would be huge. Is anyone aware of any initiatives by the feds and/or new administration that could push the rates lower, and do you have any idea when that would most likely be?

[Tarah]

We're considering refinancing. We bought our house 4 years ago at 6.25% fixed. We're not sure if we have enough equity to go forward with it, but if we go to a 15-year, the payments would be the same as our current 30 year. The problem is, do we want to go through the rigamarole again? Also, if we get another 30 year, the payments would be $200 a month lower, but we dont' want to lock into another 30 years.

When we got our first mortgage, there was a ream of paperwork to sign. They had to reschedule at the last minute, and I was working at the time. Luckily, my boss was pretty flexible and let me do the signing there. I was working at Office Depot at the time, figuring out what to do with my life, and they had me do it in the furniture section there.

[cmadler]

We'd LOVE to refinance, but we're far enough underwater that it's just not an option.

[Andy]

2 additional considerations in analyzing a refi: 1) in the long run, if you refinance, total payments may be higher than the current total obligation since you are resetting the clock to a 15/30 year mortgage; and 2) even if you can afford a 15 year mortgage, a 30 year mortgage may be a better option since it lowers your monthly fixed cost; you can always pay more than the monthly payment, but, if times get tough, the required payment is lower on a 30 year mortgage than on a 15 year mortgage. Think of the higher interest rate on a 30 year mortgage compared with a 15 year mortgage as the "option" cost, i.e., the option to pay less each month, but the opportunity to pay more.

[Ben C]

We're refinancing a 7% 30 year into a 4.5% 15 year. We'll be saving 8 years and a bunch of money by refi-ing into the lower rate and term (we've been in the home 7 years). And our payment is only going up $40 a month plus we'll be able to eliminate PMI. All in all this is a great time for us to refinance. I ran the numbers and if I can pay an additional $300/month on it, we'll have it paid off in 10 years instead. Not sure we'll do that since we'll probably want a newer house by then.

[Jamie]

We just signed the papers on Friday. We're moving from a 5.875% to a 4.875% 30-year fixed and rolling a home equity 5-year balloon loan of 6.25% into it. The new payment is less than both of the old payments put together, but we're still going to pay the full amount to eliminate the loan quicker.

Careful to make sure the economy hasn't eroded away your equity forcing you to pay for PMI insurance on a new loan. Our value is still higher than what we purchased, so we were good.

[Jim F]

I'm refinancing tomorrow at 4.5% (with one point), down from 6.375%. I'm using my credit union which has a competetive rate and adds zero of their own fees... just pass through third party costs. I'm refinancing at 30 years because the 15 year rate is not much better and I'm a bit worried about my job. If I keep the job, I'll keep making the same payment and be done in 12 years.

[thomas]

I looked into refinancing just 6 months into my mortgage. Good news was that the monthly would drop about $150. Bad news is that I'd lose every bit of my down payment and it would take 5 years to just pay off the closing fees. Sometimes a lower rate isn't worth it.

[Steve]

For those just entering the Refi process, be sure to ask your lender/broker up front about new policy/rule changes in the past few months as a result of credit tightening/foreclosure rates, etc.
I believe one change is the traditional option to pull cash/equity out when refinancing...criteria is more stringent. First, if your current loan is more than 70% of new appraisal you will be charged an additional 1/2 to 1%. If you meet the 70% test, but your credit report is under 720 you will 1)not be allowed to pull cash out and 2)not get the best rate, but instead charged either an extra 1/2 pt higher in closing costs or the that 1/2 pt will be built into a higher interest rate. We're well under the 70% loan to value(appraisal), very good income....but my wife's credit report just missed 720 due to 1 late payment within past 6 mos(a few days over due date) and a credit card that while under the card limit, balance was about 80% of the limit(they don't want balances more than 50-60% of card limit now). My credit score was very high(they go by the lowest of spouses). So while I haven't quite given up, the prospects do not look good. Our broker said these minor issues would have been no problem 6 mos ago. Another thing that I believe is still true...try to really limit any business from doing a loan app/credit report on you...unless you truly need the item/loan and intend to complete the purchase/loan. Even if you don't take the loan, the number of credit reports will cost you points off your credit score.

[christy]

We have about three years left on a 4.25% loan. Problem is we have little to deduct at tax time and it's one of the few things left that we can deduct due to our tax bracket. We owe 79K on our mortgage and 28K on a second home equity loan. (home is worth around 550K) We can get a fixed 4.3 10 year with 100K cash out with 1490 in fees. Does it make sense to refinance if we are looking to do improvements and need a write off? Our payments would be about 500 less per month than we are paying for both loans we have now - so I would either add that to principal each month or reserve for taxes since i live in the great state of NJ where the real estate taxes are out of control.