Why not refinance?

[UrbanSue]

A friend today gave us the contact information for a mortgage broker he used to refinance. He managed to get a fixed-rate mortgage with no closing costs (they were partly rolled in and partly the agent gave him a cut of his commission) about 1.25% lower than what we're paying.

 

People in our family our amazingly reluctant to give us financial advice so I thought I'd see what the collective wisdom of the Hive has to say.

 

Is there any reason NOT to refinance? I understand there are reasons we might not get as good a deal as our friend but we have great credit and we're not underwater on our mortgage. Other offers I've seen have always been ARMs but this was a fixed-rate.

 

Thoughts?

[AK_Mom4]

Length of your current mortgage is something to consider as well. I would definitely not refinance our home because we have less than 4 year left on our 15 year mortgage with a good rate. I don't want to start over again. Refinancing might also be iffy if you planned on selling within a year - not necessarily out of the question, but you would need to run numbers to see if you would get any benefit from it.

[Dana]

Refinance if you're gaining a benefit. Like going from 30 year to 15 year or from ARM to fixed rate.

Don't refi if you don't gain from it.

For instance, we did a refi a couple years ago to drop a point or two in interest and pull out cash to buy a car.

We could drop a point again if we did another refi, but we wouldn't be gaining enough to pay costs...and it would just push out the length of the loan, so we aren't doing another refi.

[gardenmom5]

We're refinancing. Again. Lower rate.

 

Last time was only two years ago, but we're saving a mortgage payment a year.

 

Fixed rate.

 

Dh has finance background.

[OrganicAnn]

The larger the loan you have the more it can make sense to refinance (ie saving 1% on 400,000 will save you more than 1% on 100,000). Be careful about the "rolling the closing costs into the loan". You are then paying interest on those closing costs. If you expect to sell within the next 5 years, it might not be helpful to refinance. As noted by a PP, if you are going from variable to fixed or from 30YR to 15YR, then it might be worthwhile. Make sure you aren't giving up something you currently have. I know someone who could do the 1/2 payment every 2 weeks instead of monthly payments (so she made the equivalent of 1 more payment per year, but it accelerated her mortgage more than making one more payment). She couldn't refinance it and get the same feature.

 

Only you can figure out if it is worthwhile to you. You have to run your own numbers to figure it out.

[Susan C.]

Our values have dropped so much that we would have to get PMI insurance. That would eat up any savings. And, adding to the mortgage balance when the value has dropped isn't a good idea.

[regentrude]

You need to do the calculations and figure out if it makes sense financially -if there is a closing cost, you need to save enough to compensate for it. Also, check the new mortgage conditions for restrictions: do you have to keep it for a certain time, are you allowed to back back sooner, etc. Make sure it is a fixed rate mortgage - interest rates will definitely rise.

Other than that, I don't see any reason not to take advantage of the current low rates.

[gardenmom5]

I know someone who could do the 1/2 payment every 2 weeks instead of monthly payments (so she made the equivalent of 1 more payment per year, but it accelerated her mortgage more than making one more payment).

 

You can also do that by paying more on your monthly payment. extra is applied to principal - not interest. the advantage of doing it that way is you pay ahead, but if you can't make that extra payment, you're not punished.

 

you would need to check with the loan details to make sure there is no pre-payment penalty.

[amyrobynne]

We've refinanced twice in the 5.5 years we've lived in this house. The first time, we went from 6.5% to 5.5% (both were 30 year loans). We'd only been in the house 5 months, so it didn't stretch the loan out much but dropped the payment by about $100/mo. The closing costs of $2500 were rolled into the mortgage. The second time was after we'd been in the house for 4 years. We went to a 20 year loan with a fixed rate of 3.75%. The monthly payment was the same, but our principal owed is dropping MUCH faster ($400+/mo instead of <$200). The closing costs were rolled in that time, too. With both refi's, we determined that it would take about a year and a half before the refi paid for itself.

 

I'd hesitate to re-start a new 30 year loan if you're already multiple years into one, but most places offer 15, 20, and 25 year loans if you ask. I would also avoid refinancing if you might move within a couple years. But run the numbers to determine the break-even point and see if it makes sense. If you have a high interest rate now, it's probably in your best interest to get the low rate while you can, so long as you have enough equity in the house. We put more than 30% down when we bought and barely had enough equity to refi the 2nd time with values dropping so much.

[Running the race]

We just refinanced from a 15year loan to a 10year loan. Every time we refinance I go for a shorter term so I don't extend our loan. Our rate went down 1.75%. Even though we don't owe that much on the house, it will take less than two years to break even. I just figured out how long until the interest rate savings made up for the closing costs. It was a no-brainer for us. We're not planning on going anywhere soon.

[UrbanSue]

Thanks everyone. Reading here and looking at our numbers, I realize we probably don't have enough equity to cover the down payment because the value has dropped too much.