When Does It Make Sense To Refinance My Mortgage Loan?

Mortgage Questions – When Does It Make Sense To Refinance My Mortgage?

October 5th, 2011 |

Author: yroth

Out of all the mortgage questions I get, this is a great mortgage question.

People will sometimes say to me that they need to lower the mortgage rate by 1% or 2% so the mortgage refinance makes sense.

This isn’t necessarily true.

There are a number of factors that go into the mortgage question: “When does it make sense to refinance my mortgage?”

Here’s the answer:

The first thing you want to do is ask yourself these mortgage questions regarding your mortgage: specifically, how long do you plan on keeping your home? Do you want to lower your monthly mortgage payment? Do you want to shorten your mortgage term? What is it you wish to accomplish by refinancing your mortgage?

If you want to lower your monthly mortgage payment and improve monthly cash flow, then first determine what your current mortgage principal and interest payment is.

Let’s say the current principal and interest mortgage payment is $1000 per month. Now look at what the proposed monthly mortgage payment is. Let’s say you can drop your mortgage payment by $150 per month. Ok, great.

Now, ask yourself, how much are mortgage closing costs? Let’s say the mortgage closing costs are $2000.

So the recovery period is 13 months – which is relatively short. You plan on keeping your home for at least 5 more years so that makes sense.

Now, let’s say you’re only dropping your mortgage rate by .5%. Does that make sense?

Yes, in my opinion it does.

The main question you want to answer is how many years have you currently paid into the existing mortgage.

If it’s 2 years or less, you’re not losing much by resetting the mortgage term to a 30 year fixed mortgage.

If you have paid into the mortgage for a longer period of time, you may want to consider looking at a shorter term mortgage – like a 20 year fixed or 15 year fixed mortgage.

The reason I say that is because you’ve paid into your mortgage for – let say – 5 years. To go to a 30 year mortgage again would mean you’re losing the 5 years you’ve put into the existing mortgage.

This is a mortgage question you have to think about before refinancing into a new 30 year fixed mortgage. Remember, you can always prepay the new 30 year fixed mortgage to build equity faster to catch up to the amount of time you’ve already paid into the existing mortgage.

Here are the benefits: you’re lowering your mortgage rate, you’re dropping your mortgage payment by $150 per month and it’s only taking you 13 months to recoup your mortgage closing costs.

Here are the drawbacks: you may be losing the time you’ve already paid into the mortgage.

Here’s another common mortgage scenario.

Many of my clients want to refinance their mortgage from a longer term mortgage – like a 30 year fixed mortgage – to a shorter term mortgage – like a 15 year fixed or 10 year fixed mortgage.

Does this make sense? It depends.

Again, the central mortgage question is: what are the benefits and costs?

The first benefit in refinancing a 30 year fixed into a shorter term mortgage is that you’re eliminating time and lots of mortgage payments that you would otherwise be making. This could amount to thousands of dollars!

The second benefit is that you’re lowering your mortgage rate – sometimes considerably.

The third benefit is that you will paying less in mortgage interest through the life of the mortgage.

So now the costs.

The main cost isn’t the mortgage closing costs, it’s the new mortgage payment.

You’ll see on a shorter term mortgage like a 15 year fixed or 10 year fixed, the mortgage rate is very low; however, the mortgage payment is higher.

If you can afford the higher mortgage payment – depsite the lower mortgage rate – and you know you can make the mortgage payment for the term of the loan, then the shorter term mortgage makes sense.

I hope that answers the mortgage question: “When Does It Make Sense To Refinance My Mortgage”?

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