Why Bother Refinancing – III
by Evan Vanderwey on 11/03/10 at 8:33 am
My rate is 5.75% now, and I don’t think it would be worth my while to refinance.
This client, like so many, are able to refinance because of the “open access” and “plus loan” programs that are available, but because their current rate is not real high and because of the pricing adjustments these programs come with the value of refinancing might be squeezed out.
This client has a first mortgage of $300,000 on a home they’ve owned for a while. Two years back they finished their basement and used an equity line of credit for that – that balance is $45,000. They have seen property taxes increase on their home almost every year they’ve owned it except for the past year – this year they saw a rather large decrease in the taxable and assessed values of their home. They are hoping for a reduction in taxes.
Their mortgage has only been around a couple of years because they refinanced once already since they purchased the home early in 2008. They can’t make higher payments than they are making because of a change in income and because they’re committed to paying off a few credit cards and a car loan that they still have out there.
Because the appraisal of the home will be a little over $300,000, the new programs will apply to them making the refinance possible, but will make their rate higher than the going rates. On the day we talked the most optimal rate/cost offering would have been 5.375% with closing costs just over $3,500.
When we calculated the new payment, and considering the new tax amounts, we were surprised to see that the payment would go down by more than $210 per month! At the outset, this appeared promising. Yet the internal changes to the payment needed to be looked at.
The savings of $210 per month came from three parts of the loan:
- The largest contributor to the lower payment was the property-tax reduction. This amount was $115 per month.
- Another contributor was the term of the loan. Because the current mortgage had been around for two years, it only had 28 years left. The new mortgage would have to be written for 30 years – this causes a reduction in the amount of principle reducted in every payment – another $20 per month.
- The interest-rate reduction contributed too – $75 per month of the total $210 payment reduction.
Let’s look at the break-even point. If the cost for the refinance (even though it’s rolled into the mortgage) is $3500 and the savings is around $75 each month, then the cost is not made back for almost 4 years – 46.6 months to be exact.
After having gone through each of these points and explaining that the property-tax amounts could be given by the taxing authorities and reported to the lender for a partial payment reduction based on lower escrow payments, this client bowed out. I don’t blame him.
Having said that, cases like this are very prevalent, and many factors could change the situation for you: no second mortgage, a slightly higher current mortgage rate or loan amount, a slightly better appraisal of your home, just to name a few.
Then there’s this important question: What’s a lot of money? If $75 is a lot to you and you plan to be in the home for the long term, then go for it. Don’t let another person’s conclusion be your conclusion.
You can see in this case the importance of getting at the heart of the savings. This loan is often sold but would less often be purchased.
Given a full and accurate description of what is improving and why, the well-informed consumer will make a good choice for themselves. Get the facts about your mortgage.
I have always liked Zig Zigglar’s definition of selling. It went something like this:
Selling is the process of understanding and educating so that there is a “putting together” of a good sales person’s product with the real needs of an informed customer.
