Why Refinance Your Mortgage? Lower Payments?

Here is a post that demonstrates one reason to refinance:  lower the monthly payment. If you compare the monthly payment (assuming the loan amount were the same, which it is not because, as we know, over time, the loan amount is being paid down), with a new, lower interest rate, the principal and interest payment would be lower.

In the example that is presented, where we do not know the loan amount, the borrower is spelling out that the monthly tax and insurance payment has increased, which it would anyway, but the P & I payment would be lowered by $144 per month. Not bad. And the net closing costs were around $2,000.

Is it worth $2000 to refinance? A couple things. First, it is accurate that a borrower can pay the closing costs at closing or can role this amount into  the loan (add it to the current loan amount). This, then, means they are paying interest on the additional $2000.  Here, they are paying an additional $100 per year in interest on the $2000 amount added to the loan amount. Good thing or bad thing? A small thing, but something to think about. In five years that’s $500. My thinking, if you have the $2000, why not pay it at closing and save the money that would be paid on interest. The whole point of refinancing.

Also, this borrower brings up an important point to remember. When refinancing, you will have to re-establish a tax and insurance escrow account. Unfortunately we can’t roll the old account into the new one, so the borrower will have to bring money for the new account, and then the current lender will reimburse the borrower for the money that is being held in the old escrow account, usually within a few weeks of closing. In addition, the borrower will pay the accrued interest for the current loan to the current lender, and will then pay prepaid interest (paying the interest that will accrue, for the new loan, usually through the end of the new month, just as you would do in a purchase), and then you will skip a month for the new, first month’s payment.

But wait:  was it work paying $2000 in closing costs? Look at it this way, from a payment perspective, if you divide the monthly lower payment amount ($144) into the cost ($2000), it will take just under 14 months to break even, and then these borrowers are truly saving their $144 per month. Sound good to you?

Last, they are also paying more than the required minimum, as part of their goal is to pay down their loan faster to pay less interest for the life of the loan.  To me, neither bad nor good. It makes them comfortable and happy. That’s the important thing.  I like happy people.

13 January 2010 | Closing Costs, Interest Rate, Refinancing | Comments

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