Mortgage interest rates have continued to decrease over the past year (much to my surprise).  Once again, some homeowners are wondering whether it might make sense for them to refinance.  While there are many factors to consider when making such a decision, here's one way perspective that might help you decide whether to proceed . . .

The theory:  With the assumption that you are not trying to pull out equity via a refinance, you need to determine how long it will take for the monthly cost savings (with a lower interest rate) to exceed the cost of refinancing.

How it works out:

You bought a $300,000 house three years ago for $300,000 with a $50,000 downpayment.  Thus, the original loan was for $250,000 --- but the balance is now down to $240,000.  The interest rate on the loan is 6.25%, which made the principal and interest payment $1,539 per month.

Today's rate of 5.625% looks good to you, but the closing costs will be $3,500 -- which you would have to finance because of your current cash flow situation. 

The new loan would be $243,500 (old balance + closing costs), financed at 5.625% over 30 years, which makes the new principal and interest payment $1,402 per month.

When it makes sense:

In the scenario above, many people would immediately jump at the opportunity to save $137 per month ($1,539 - $1,402).  However, bear in mind that it will take 26 months for the monthly savings to pay off.  That is to say that since you paid $3,500 of closing costs in order to refinance, it won't be until the 26th month ($3,500 / $137) that you actually see a net gain for your decision.  Thus, in this scenario, if you know you were going to stay at least two years, it would make sense to refinance --- but not if you thought it was likely that you would sell sooner.

Your scenario:

There may be more variables in your situation than I mentioned above.  Perhaps there is a second mortgage with a variable rate, for example.  I'd be happy to help you with calculating when it would make sense to refinance, or you can contact a lender to get a similar analysis.

Just remember --- even if you are lowering your rate, it doesn't always make sense to refinance!

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Have any questions? Contact Scott Rogers at 540-578-0102 or scott@funkhousergroup.com