Should You Refinance?

Money Matters Money BagWith the drop in interest rates, many people are again considering refinancing their mortgages. When this thought arises, the next question is always does it make economic sense to “refi” as we say in the industry. 30-year fixed rates this week are in the high 3’s (percents) and 15-year fixed are in the mid 3’s (percents). So let’s talk.

There are various ways to look at refinancing your mortgage. Some would suggest that you follow the 2-2-2 rule. The thinking behind this says that if you have been in your home 2 years, plan to stay another 2 years, and your new interest rate is 2% below your current rate, then Bob’s your uncle!

Another rule of thumb simplifies the 2-2-2 and says that if your new rate is 2% lower than your current rate, it makes sense to refi. In researching this topic, I found the following formula. (I think it’s the engineer’s formula for refinancing).

N = ln[(-i xPVA/PMT) + 1]/-ln(1+i)= number of months to break even.

Actually, this formula isn’t as bad as it looks. In practice, one would take the closing costs necessary to refinance and divide that number by the amount of monthly cash savings resulting from the refi. If the number of months to break even is say 36 months and you are only planning on staying 30 months, then refinancing does not make sense.

But as is typical with most rules of thumb, one thumb does not fit all. You should also take into account the cash out-of-pocket that may be necessary to refi. Although closing costs may be rolled into the loan, new escrow accounts (amounts set aside for property taxes and insurance) might need to be funded again as they were at closing. The current escrow account would come back to you from the previous lender but there could be a timing issue on receipt of those funds.

In addition, there are different rules for refinancing conventional loans, FHA loans and VA loans. When it comes down to it, you need an expert. Do not try this at home. We haven’t even talked about appraisals and equity.

There is an easier way. I can highly recommend a Christian company with whom I have done a lot of business. Call Judy Philips (469-635-7555) at JPMortgage Group in Flower Mound and she can give you the “hard” numbers so you can make a good decision. No hard sell here, just good honest advice. Please tell her Tom Jensen said to get in touch. Those words will get you her premium service!