Get a com­plete fi­nan­cial pic­ture with re­fi­nanc­ing

Baltimore Sun Sunday - - REAL ESTATE - By Ilyce Glink and Sa­muel J. Tamkin

Q: If you have a fixe­drate mort­gage, why would you want to re­fi­nance if you plan to stay in the home for the du­ra­tion of the mort­gage?

A: There are many rea­sons to re­fi­nance your 30-year or 15-year fixe­drate mort­gage. The first and best rea­son: to save money.

When Sam bought his first home, back in 1987, he took out a 30-year fixe­drate mort­gage with an in­ter­est rate of 12.75 per­cent. Any mean­ing­ful drop in in­ter­est rates af­ter he took out that loan meant he could re­fi­nance and save a bun­dle of money over the re­main­ing years on his loan.

Over the past 10 years or so, in­ter­est rates have re­mained ex­traor­di­nar­ily low. The 30-year fixed rate has fluc­tu­ated be­tween about 5.6 per­cent in June 2009 and a low of about 3.3 per­cent in De­cem­ber 2012, ac­cord­ing to the Fed­eral Re­serve Bank of St. Louis web­site. To­day the 30-year fixed rate stands around 4.5 per­cent.

If you locked in a loan at 4 per­cent and in­ter­est rates never fell be­low that level again, you might not be able to save money by re­fi­nanc­ing. If in­ter­est rates fall be­low that point, it might be a smart move to re­fi­nance and ob­tain a lower in­ter­est rate.

But not all re­fi­nanc­ing is worth it. If the in­ter­est rate is marginally lower and the costs to re­fi­nance are high, you could be worse off with a new loan.

We’ll try to de­scribe it sim­ply. If you take out a $200,000 loan to­day for 30 years at 4.5 per­cent, you’ll have a monthly pay­ment of about $1,013. (This does not in­clude real es­tate tax or in­sur­ance pay­ments.)

If in­ter­est rates drop to 4 per­cent a year later and you re­fi­nance, your new 30-year mort­gage pay­ment would drop to about $954 but — and this is im­por­tant — you’d have added a year of pay­ments to the loan. Your old loan would have been paid in full in 2049 and the new loan would be paid off in 2050.

To com­pare these loans, you’d want to fig­ure out what your pay­ment would be if you paid off the new loan in 2049 so that it would ter­mi­nate at the same time as the old loan.

Us­ing sim­ple on­line amor­ti­za­tion cal­cu­la­tors, you can com­pute what you’d need to pay on your new loan to get it paid off in 29 years: about $972 per month. So the ac­tual dif­fer­ence in the monthly pay­ment on the old loan at $1,013 and the new one at $972 is a sav­ings of about $41 per month.

Here’s the key: You need to know what it will cost to re­fi­nance. Re­mem­ber to ex­clude tax and in­sur­ance es­crows or other pay­ments that you’d make no mat­ter what. When the lender tells you that you’ll have to pay ti­tle com­pany or set­tle­ment com­pany fees of $2,000, along with record­ing or other gov­ern­ment fees of $500, you’ll know that your clos­ing costs will be about $2,500. Be­cause you save $41 per month on the new loan, it will take a bit more than five years to break even on the re­fi­nance.

Spend­ing $2,500 to­day and sav­ing only $41 per month may not be worth it. Hav­ing said that, if you ac­tu­ally re­fi­nance and keep that loan un­til 2049, you’ll save over $20,000 over the life of the loan.

We’ve made many as­sump­tions, of course, and the re­al­ity is that most Amer­i­cans don’t stay in their home for 30 years. You’d want to bal­ance the odds that you’ll stay in a home for a given length of time with the sav­ings you’ll get from re­fi­nanc­ing. The lower in­ter­est rates go and the lower the costs to re­fi­nance, the bet­ter you do in the short term and over the length of the loan.

Ilyce Glink is the CEO of Best Money Moves and Sa­muel J. Tamkin is a real es­tate at­tor­ney. Con­tact them through the web­site


Home­own­ers must fac­tor in clos­ing costs on a new loan in ad­di­tion to any monthly pay­ment de­crease.

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