Issues to Weigh in Deciding to Get a New Loan
With 30-year mortgage rates at their lowest levels in more than a year, it may be time to consider refinancing--especially if you got a mortgage last summer when rates peaked, or if you have other high-rate consumer debt that you’d like to fold into your home loan.
The rule of thumb is that refinancing makes sense only when you can cut your mortgage interest rate by 2 percentage points or more. But that rule of thumb is often wrong.
In the right circumstances, it can make sense to refinance even when you’re shaving a fraction of a percentage point off your loan rate, says Keith Gumbinger, vice president of HSH Associates, a Butler, N.J.-based publisher of mortgage information.
It even makes sense when there is no interest-rate savings at all if the refinancing allows you to drop costly private mortgage insurance, which lenders typically require if your down payment is less than 20%, Gumbinger adds.
“At least some people who took out a mortgage with less than a 20% down payment in the past year or two--and that’s a lot of people--have seen their houses appreciate quite markedly,” says Gumbinger. “If the appraisal indicates that they have sufficient equity, they can get a new loan that doesn’t require private mortgage insurance.”
Dropping PMI can save anywhere from $25 to $150 a month, he adds.
To find out if refinancing makes sense, compare the cost against the savings over time. Refinancing is wise if you plan to stay in the house--with the same loan--long enough to more than pay off the cost of the refinance through the monthly savings.
Closing costs on a home loan generally run between 1% and 2% of the loan amount. The fees include costs for points, which are prepaid interest, home appraisals and title insurance, as well as other fees that lenders may impose. Some offer no-cost loans, but the interest rates on these loans are generally a bit higher.
How do you determine what you’ll save monthly? Figure out what your monthly payment would be on a new loan, then subtract that from your current payment. Then, divide the closing costs involved in getting the new loan by your monthly savings to determine how many months it will take you to break even.
Use the multipliers in the accompanying chart to get a rough idea of your new monthly payment.
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Refinance Calculator
Use this chart to figure out how refinancing would affect your mortgage payment. Drop the last three zeros from your current mortgage amount and multiply that by the multiplier that most closely corresponds to your new interest rate and loan term. Subtract that number from your current loan payment, and that’s your monthly savings.
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Multipliers Loan rate 30-year loan 15-year loan 8.0% 7.3376 9.5565 7.9% 7.2680 9.4988 7.8% 7.1987 9.4414 7.7% 7.1296 9.3841 7.6% 7.0607 9.3270 7.5% 6.9921 9.2701 7.4% 6.9238 9.2134 7.3% 6.8557 9.1568 7.2% 6.7879 9.1005 7.1% 6.7203 9.0443 7.0% 6.6530 8.9883
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Example: Consider a $200,000 loan at 8% with a monthly payment of $1,467.53. To calculate refinancing at 7.4% for 30 years, multiply 200 by 6.9238.The new monthly payment is $1,384.76, saving $82.77 a month. If the loan costs are $2,000, it would take 25 months for the refinancing to pay off.
Source: Times research
