Why Bother Refinancing – II
by Evan Vanderwey on 10/03/10 at 9:19 am
I’m thinking about selling my home soon and moving out of the area. Should I bother refinancing?
This client of mine (Joe again) is in a $250,000 mortgage that I wrote for him in 2006. It was a 15-year fixed-rate loan, and his rate is 5.875%. He put plenty of money down at the time and since he has been making payments on a 15 year clip, he has enough equity in his home to qualify for a mortgage right now even though home values have dropped in his neighborhood. The appraisal would only have to come in for $260,000 today for him to do a mortgage with no price adjustments, and with his good credit scores, the new loan would actually be slightly less expensive than when he did his last loan.
In fact, this loan, rewritten at a 4.5% interest rate would allow Joe to pay off his loan in around 10 years saving him almost $50,000 in payments!
Yet, he is quite sure that he will be moving soon. In fact, this fall, 2010 will be the date he puts the house on the market and aggressively tries to sell it. The closing costs of just under $2500 will not be “made back” for more than 11 months. Even if it took 6 months for him to sell the home (spring of 2011) he would barely have made back his money spent to do the mortgage.
I told him to not bother, there would be no real savings in that time frame.
We did talk further though about the chances of him staying around a year longer than expected. If he would do the loan at the lower rate and then make the same mortgage payment he was making before, then two years after the loan closing, he would have paid down $7000 more if he had refinanced. The entire first year is spent making back the closing costs – but the next few years are very beneficial!
If Joe thinks he might stick around, then I think he might regret it if he does not refinance now. Selling two or three years from now in his case would have saved him a lot of money.
Let me also add that if Joe had been in an Adjustable Rate Mortgage and he had any doubts that he would be out of the home very soon, then I would have recommended a refinance. The ARM rates don’t scare me a lot, but the uncertainty about the rates coupled with the uncertainty about his time frame would lead me to say, “Let’s lock this down now while the locking is good.”
