Monday, May 28, 2012

Should I Refinance


           If you are lucky enough to have at least twenty percent real equity in your home, then today’s record low setting mortgage interest rates make considering a loan refinance a must for any person planning on staying in their home for at least a few years.  The only question is whether it makes economic sense to refinance, and upon what terms and conditions.

          In order to understand exactly whether it is worth refinancing must you start with the current costs of your mortgage. Depending on your interest rate and your anticipated time left in the subject home will allow a determination as to whether refinance makes economic sense. In addition, in some cases a higher monthly payment in a move to a shorter amortization could help you build substantial equity in a much shorter time.

          For example homeowner with a $350,000 first mortgage with an interest rate of 5.25% amortized over thirty years will pay $1,954.45 per month for the remaining term of the mortgage. If that person currently owes $315,000 and is interested in a thirty year fixed rate loan, today’s rates of 4.25% will reduce the monthly mortgage payment to $1,549.61, or $404 per month.  Part of the savings is due to the lower principal balance, but most the savings is due to the lower interest rate.

          Interest rates on a fifteen year fixed rate amortization loans are as low as 3.43%. Using our same example, monthly principal and interest payments would increase to $2,241.07, or about $286.00 per month. However, after five years of payments, the fifteen year loan balance would only be $227,384.96, which is approximately $60,000 less than the loan balance amortized over 30 years at the 4.25% rate.  The higher monthly payment will result in $41,000 in payments over 60 months but you will realize nearly $20,000 greater reduction in the principal balance due to the lower interest rate.

          The average American family moves every seven years. If you are confident that you will not be in your home more than five years a special 5/1 adjustable-rate mortgage may actually be the best course of action.  Interest rates on 5/1 arms are less than 3%, with a monthly payment over thirty years equal to $1,314.50.  That is a savings of over $639.95 per month.  At the end of five years the amount owed will be approximately $279,010.71.  However, if the additional $639.95 is paid with the mortgage payment, the balance owed will only be $236,982.74.
          The only catch to any refinance the actual refinance cost. On a typical $315,000 mortgage refinance, the borrower will be looking at government taxes of $1,732.50, title insurance premiums of approximately $2,500.00, appraisal costs of $350, credit report, tax search and floods search fees of approximately $250, Doc prep fees of about $500 and any points that the lender is charging for the privilege of closing the loan.

          With costs of approximately $5,000, any refinance is not cheap.  If the borrower is going to replace an existing thirty year loan with a new thirty year loan it will take nearly fourteen months of lower-cost loan payments to simply make up the cost of the refinance. That is why it is crucial to determine how long you will stay in the home to see if the cost of refinance is worth the lower interest rate. If the loan has an additional point or two, it will take nearly eight months per point to make up the difference.

          Many homeowners simply ignore the benefit of refinancing and continue to pay mortgage payments on loans with interest rates over 5%. Some have rates as high six or seven percent, and converting to a lower rate loan today would result in even greater savings. Take the time to check your loan rate and determine whether it makes financial sense for you to seek a loan refinance at this time. There are many quality mortgage brokers who will assist you in reviewing your savings at no cost to you so you can determine whether it makes financial sense for you to refinance your home.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in mortgage loans, and can assist borrowers and banks in all loan matters.  They can be reached at 561.842.3000 or at www.warddamon.com

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