Vail Valley: It might be time to refinance
July 22, 2010
Today’s low mortgage rates are eclipsing anything we have seen in the last several years, and while many are simply refi-weary, having refinanced their homes more than once the last few years, it’s important for a consumers’ financial future to check every possibility out there to save money these days.
So when does refinancing make sense? The quick answer is there is no quick answer to determining what is right. Many factors play into the scenario, including your current rate, the value of your property and how long you plan to stay in the home, and what your closing costs would be on a new refi.
First, you obviously want a lower rate, and a 30-year fixed mortgage is in the low to mid 4 percent range right now. Adjustable rates for loans that are fixed for five or seven years are in the low to mid 3 percent range today.
Second, you need to be aware of amortization. Every loan (except for interest only) has the monthly payments divided between principal and interest. The longer you pay, the larger percentage of your payment goes to pay down principal. If you start over with a new loan you generally pay less principal in the next few years, although that is not always the case.
This subject deserves some close study, because while your loan balance may not drop as quickly, you may still come out ahead by having payments that may be several hundred dollars a month lower. The key to analyzing this is to get an amortization schedule for your current loan that shows how much you will pay every year from now on in principal and interest. Then get a schedule for your possible new loan.
Take the two and note where you will be in a given period on each of them, say three or five years. Hopefully the new loan will result in a lower balance at that point and you are automatically ahead of the game.
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Next, multiply your monthly payment reduction by the number of months in the period you are looking at (say 36 or 60). If your balance goes up a bit take that number and subtract what you saved in payments. If it went down, add the savings to what you saved in payments.
Next, look at your estimated loan closing costs for items including title work, underwriting, filing fees, appraisals and the like. These are your hard costs. If these seem a bit high ask your lender if you could have lower costs in exchange for a slightly higher rate.
Exclude what your lender has proposed collecting for tax and insurance escrows or prepaid interest. The taxes, insurance and interest you have to pay to somebody anyway, so those items are really soft costs.
Calculate your savings in total monthly payments – add or subtract the change in principal and subtract your hard closing costs and you will have a clear understanding of how much a refi will or will not cost you.
If you find your principal balance is increasing under the new loan scenario consider a 15-, 20-, or 25-year term instead of a new 30-year loan. The payments will be higher than the 30-year but still may be lower than what you have and your pay down will be quicker.
Qualifying for a mortgage loan is harder than it used to be, but we have talked to many borrowers lately who did not really think they could qualify but actually could. I recently ran numbers for a homeowner in Miller Ranch and we determined he could save as much as $30,000 over the next seven years.
Chris Neuswanger is a loan originator with Macro Financial Group in Avon and can be reached at 970-748-0342. He welcomes mortgage-related inquiries from readers.