What to Watchout for When Refinancing
Posted on | May 7, 2009 | No Comments
The banks and mortgage companies have done such a great job selling the public on the advantages of a low interest rate that people allow the rate to be what drives them to refinance their loan. And while getting a lower interest rate is a good thing, you must weigh the cost of the refinance against the savings to determine if it really is in your best interest to refinance your loan.
In essence, what you do is this; take the cost of the loan, which is all the expenses except for the pre-paid items that include taxes and homeowners insurance, and divide that by the monthly savings the new loan will give you. Take that and divide by 12 to give you the months that you will have to pay the new loan to break even. Here is an example.
- Old payment: $1210.00 per month
- New Payment: $1130.00 per month
- Savings: $80 per month
- Cost of the loan (does not include the pre paid items – taxes and insurance) $3,300
- $3300 / 80 = 41.25 months to break even
- 41.25 / 12 = 3.44 years to break even
If you plan to move within the 3.5 yrs it will take you to make up the difference in payments then you should not refinance unless there are other circumstances like an ARM that will adjust. However, if you plan on living in the home for 5 plus years, then it makes since to refinance the property.
Comments
Leave a Reply