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Should I Refinance My Home?

At what interest rate would it make sense for me to refinance my home?

My wife and I are 61. The market value of our house is $300,000 We have a loan balance of $118,000 at 6.3% fixed for 30 years. Twenty five years remain on the mortgage. We have a FICO score of 812. At what rate would we have to refinance to make it worthwhile considering fees, etc? An suggestion on where to go for the best refinance deal? We plan on staying in the house for five years until we both retire. One of us is going to part-time soon and we want to refinance to save on monthly payments.

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Bill's Answer
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Highlights

  • Understand the total cost of a mortgage loan refinance.
  • A refinance can lower the total cost of your mortgage loan significantly.
  • A cash-out refinance loan can help you pay for remodeling or college.

If you are asking yourself: Should I refinance my home mortgage loan then know that a refi mortgage can be used for several purposes — to lower your interest rate, to lock in a fixed interest rate, to pay off credit card debts, or to combine two mortgages into one. It is a substantial financial decision to make, so make sure you are well informed with information before taking any action on a refi mortgage. In your case it appears that you may want to look into a lower interest rate mortgage. If you are planning on only staying in the home for five years then you may want to consider an adjustable rate mortgage that is fixed for the first five years.

Calculating the Break-Even Point

The Federal Reserve Web site published a helpful Web page on mortgage refinances that includes this table that helps you calculate the break-even point for a mortgage refinance. The example assumes a $200,000, 30-year fixed-rate mortgage at 5% and a current loan at 6%. The fees for the new loan are $2,500, paid in cash at closing.

  Example Your numbers
Current monthly mortgage payment $1,199  
Subtract new monthly payment -$1,073  
Monthly savings $126  
Subtract your tax rate from 1
(e.g. 1 - 0.28 = 0.72)
0.72  
Multiply monthly savings by your after-tax rate 126x0.72  
After-tax savings $91  
Total of new loan's fees and closing costs $2,500  
Divide total costs by monthly after-tax savings $2,500/91  
Number of months it will take to recover refinancing costs 27 months  

you may also want to compare the equity build-up in both loans. if you have had your current loan for a while, more of your payment goes to principal, helping you build equity. if your new loan has a term that is longer than the remaining term on your existing mortgage, less of the early payments will go to principal, slowing down the equity build-up in your home.

your questions

it is difficult for me to say at what exact rate would be best for you to make the decision to refinance your mortgage. ideally, you want to break even (the cost of the refinance divided by the amount saved monthly) within 24-36 months of closing the refinance. this way you have at least two years worth of true savings. it is also difficult for me to comment on the fee structure because each lender or broker will charge different amounts.

i encourage you to visit the bills.com savings center to get a free quote on a mortgage refinance from up to four pre-screened lenders. or use the calculator below to see the latest rates.

i hope this information helps you find, save, and learn.

best,

bill

bills.com

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4 Comments

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  • JC
    Jan, 2012
    Jim
    Edison Twp, NJ
    I have a 333K mortgage on a property now worth 333K at 30 year 4.75% rate. HARP does not apply to us because house was purchased after 5/31/09. We will be one less income soon due to job instability-therefore a lower mortgage payment would greatly help. However with that we will need to put cash into the house if we refinance - is it advisable for us to refinance now? Or keep cash liquid?
    0 Votes

    • BA
      Jan, 2012
      Bill
      Given your situation, you will have to decide between saving on your financial costs versus peace of mind. Your first consideration should be , where is your "down payment" (or in your case equity) money coming from? What is your overall asset/liability situation. The first thing you want to do, is build up an emergency fund that will carry you through at least 6 months. Since you know that you are soon to lose income, prepare for that situation. You will lower your monthly mortgage payment about $150 a month. Your savings are less marked, due to the fact that you still have 28 years left on your current mortgage, and the interest rate differential is not too large. Your financial breakeven point will be about 2 years, given overall fees of 2%. Another solution to lower your overall financial costs, without refinancing, is to make lump sum payments into your current mortgage. This will allow you the flexibility of keeping more of your assets liquid.
      0 Votes

  • CY
    Oct, 2011
    Crystal
    Sandyston Twp, NJ
    I am having such a hard time trying to refi because of course my mortgage (I have two) are more than my home is worth. I have researched and researched and I cant seem to come up with a solution. I refuse to do something that will ruin my credit that I have worked so hard to maintain. I read about a HARP program however my primary mortgage isn't a fannie or a freddie. I did a loan mod a couple years ago on my primary mortgage, but my ultimate goal is to combine the two and refinance them both into a decent percent. The first mortgage is at 5% and the second is at 9.15%. Is there any hope for me?
    0 Votes

    • BA
      Oct, 2011
      Bill
      Unless and until Congress and the Administration can agree to deal with the ocean of underwater mortgages in the US today, I do not see much help for homeowners or the housing market. See the Bills.com resource Refinance Underwater Mortgage to learn more.
      0 Votes

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