It’s Your Money Column – Should I Refinance Now that the Rates are Lower?

Question: When we first purchased our home (a little over two years ago), we used an adjustable rate loan. Last year we refinanced and locked into a fixed rate of 7.3 percent. The rates now are super low and it sounds like it would be a good idea to refinance again, but I am admittedly clueless about this kind of stuff. It sounds so good on paper, that there must be a catch. How many times can I refinance?

Answer: You can refinance as many times as you wish, but the costs associated with refinancing are the catch. It can cost you several thousand dollars every time you refinance your mortgage. Refinancing might be a good idea if you plan to stay in your home long enough to cover the costs involved in getting a new loan.

When you’re thinking about refinancing, there are two basic questions you need to answer: How long do I plan to stay where I am, and how much will it cost to get a lower interest rate loan?

Check first with your current lender about refinancing. Ask about no-cost and low-cost refinancing. Then call at least three mortgage lenders and compare interest rates, points and other closing costs. Lenders have been swamped with requests for information about refinancing, so be patient as you gather information.

Current mortgage interest rates will be quoted with and without points. You always want to know the rate without any points. Then you can ask how many points you would be charged to buy a lower rate.

For example, recent rates for 30-year loans are averaging about 5.85 percent with 1.43 points (including the origination fee). A $150,000 mortgage with 1.43 points would cost $2,145.

How much would you save by having a 5.85 percent loan compared to your present 7.3 percent loan? Your current monthly principal and interest (PI) payments at 7.3 percent are approximately $1,028 per month. At 5.85 percent, your PI payments would be $885 per month, a difference of $143 per month.

To determine if switching to a lower interest loan is a good bet for you, subtract the PI amount you are paying now from the PI payment you would make with the lower cost loan. You can compute how many months it would take to pay off the fees. In your example, your current monthly payment is $1,028. Your new monthly payment would be $885. The difference is $143 per month. If the total cost of refinancing is 3 percent of $150,000, your total cost would be $4,500. If you divide $4,500 by the $143 per month savings, you will come out ahead in 31½ months or a little over 2½ years.

I’ll talk more on mortgages in next week’s column.