To Refinance or Not?

This is easily the most frequent recent topic of conversation when I bump in to past clients, fellow Chamber of Commerce members and almost anyone that knows I’m in Real Estate.  The desire to take advantage of the great (record setting) lows in mortgage interest rates is overwhelming. Of course the sticking point is the ‘lack of equity’ caused by depreciation in our local housing market.

Not everyone has that problem, of course, but many do.  So here are a few thoughts on refinancing.  Disclaimer: I am a Realtor®, not a mortgage broker.  I don’t originate loans, and this will be fairly simple.

There are good reasons to refinance, and there are bad reasons to refinance.  Good reasons include changing from a dreaded Adjustable Rate Mortgage (ARM) to a fixed rate mortgage – especially now with the low, low rates.  Or perhaps you want to reduce your monthly payment.  Who doesn’t?

If you owe 20 years on your current, higher interest mortgage and are told that you can refi for 15 years and still have lower monthly payments, why wouldn’t you want to do it?  Make sure that if your loan ‘clock’ is starting back at a 30 year term, you’ll be in for the long haul, or at least that you’ll be making payments for another 30 years.

Remember that there are costs involved with a refi. You have to build those in to your analysis to make a good decision.  There are also some costs (typically a percentage of your points) that are partially offset by tax deductions.  Ask your accountant or tax preparer about those.  Will there be appraisal, application, and credit check fees? Will you need all new title insurance?  Can you get a credit from your existing title insurance?  All of those factors need to be considered to find out your upfront costs.

Even if you ‘roll them in’ to the new mortgage and your monthly payment is reduced, you should understand how many months it will take you to ‘break even’ on the costs of the new loan.  It may be 8 or 9 months, or it could be 24 to 27 months.  In the first case, if you have to sell in a year, the refi choice was a good one. In the second case, not so good.  And things happen.

Perhaps you or your spouse will get a job offer that you can’t refuse and forces you to sell.  Maybe a family situation arises that requires you to move.  Life can be like that.  Here are a couple of references to get you thinking and to help you if a refinance is something that you’ve been considering.

First, a recent (August 2011) article from Forbes.  It is pretty short, covers a lot of ground and has a downloadable refinance calculcator in MS Excel format.

Here’s an online article from Bills.com that covers some other thoughts, and a lot of other links – in case you feel like doing a lot more research.  If you’d like to just plug in some numbers, try using the calculator I mentioned above in the Forbes article, or try these.  One is from bankrate.com and one is from Realtor.com.  Both are slightly different, but will help you understand the thoughts on refinancing.