Should I Refinance my Mortgage Now or Wait? | YoBucko

We got a great question from one of our readers last week and wanted to share our response with our community. The question came from a 29-year old guy from Northern Virginia, we?ll call him Lenny, who bought his first house a few years ago and asked: should I refinance my mortgage now or wait? Here?s the situation:

Lenny took out two loans to buy a condo for $255,000 in 2008: a $21,000 30-year mortgage (at 9.25%) and $204,000 30-year mortgage (at 5.88%). His total monthly payments on the mortgages are $1580. He?s thinks he may move in the next 3-5 years, but is wondering whether or not to consolidate the loans into one payment as interest rates are historic lows.

Things to Consider before Refinancing Mortgage

The real question Lenny is asking here is how long it will take to break even on refinancing his home? Will refinancing save him money or cost him money in the long-run? Here are some of the things you should consider before refinancing a mortgage:

• Original Mortgage Amount ? First, you need to know how much your original loan amount was. In Lenny?s case, he borrowed $225,000.
• Current Interest Rate on Mortgage ? What is the lender charging you in interest? Lenny has an average interest rate of 6.2% on both his mortgage loans.
• Mortgage Term ? how long was the original mortgage for? Lenny took out two 30-year mortgages.
• Remaining Mortgage Payments ? How many years (or payments) are left on your current mortgage? Lenny has just over 26 years left.
• Income Tax Rate ? As most homeowners are aware, you can deduct the interest you pay on your mortgage. So including your tax rate in the calculation is important.
• Appraised Value of Home ? If your home value has increased, you may actually have more equity in your home than you did before. Why does this matter? In Lenny?s case, he doesn?t have more than 20% equity in his home. If his home price has increased, he may have more than 20% which allows him to stop paying Private Mortgage Insurance, or PMI. On a $255,000 home, PMI will be approximately $100 per month. That?s potentially $1,200 in yearly savings if he doesn?t have to pay it.
• New Mortgage Term ? How long is your new loan for? 30-years, 15-years? Your monthly payment will increase if you select a shorter-term mortgage, but your total interest cost on your home will be lowered in the long-run.
• Closing Costs ? Closing costs are a major factor to consider. For a mortgage refinancing loan, the costs are not much less than getting a mortgage the first time. For a breakdown on the average closing costs on a mortgage, check out Bankrate.com?s Closing Cost Survey.
• Points ? Points are basically interest rate discounts. You can pay for points when you refinance your mortgage. If you do so, it will cost you more up front but may be a way to save on interest in the long run.
• Credit Score ? Your interest rate is determined by several factors, not the least of which is your credit score. To get an estimate of your credit score for free, check out Credit Karma.
• New Mortgage Interest Rate ? The main reason you would even consider refinancing your mortgage is to reduce your monthly payments. The primary factor that helps you determine this is the interest rate. If interest rates are lower today than they were when you got your original mortgage, you may want to consider refinancing your mortgage. Today, mortgage interest rates are at historical lowsand it may be a good time to consider refinancing your mortgage.
• Private Mortgage Insurance ? As stated above, Private Mortgage Insurance, or PMI, is insurance you pay mortgage lenders to protect them from you not repaying your loan. Once you own (or have equity) in your home above 20%, you can stop paying it. If you have less than 20% equity, you?ll need to factor PMI into your refinancing break-even calculation.
• Estimated Years to Live in Home ? If you are asking yourself whether or not you should refinance your mortgage, you?ll need to estimate how long you will live in your current home. If you plan on moving out in the next year or two, it may not always make sense. In other words, the cost of refinancing may exceed the money you save on monthly payments.

Should Lenny Refinance his Mortgage?

Consider all of these factors, what should Lenny do? Based on our calculations, Lenny should consider refinancing if he plans to stay in his home for more than 18 months. Here?s why:

1. Lower Mortgage Payments ? Currently, interest rates are lower than they have been in many years, and now is a good time to consider refinancing. If Lenny could get his mortgage refinanced at 4% today (from his current 6.2%), it would lower his mortgage payments from $1,472 to $1,107. That?s $365 per month or $4,380 per year in cost savings.
2. Save Money on Interest ? Over the long-term, a lower interest rate will save Lenny a ton of cash that he can save or invest. Over the life of his loan, a lower interest rate equates to $113,000 in savings on interest alone.
3. Strong Local Real Estate Market ? The Northern Virginia real estate market is strong, and an investment in a property today could be a very wise investment over the long-term. Even if Lenny decides to move out of the house in 18 months, he has a piece of property that he could rent out and still cover his mortgage payment. That means he has a potentially valuable asset in a strong market that could potentially earn him additional cash flow.

If you want to calculate whether or not you should refinance your mortgage, check out Bankrate?s mortgage refinancing break-even calculator.

Source: http://yobucko.com/loans/should-i-refinance-mortgage

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