If you are lucky enough to have at least twenty percent realequity in your home, then today’s record low setting mortgage interest ratesmake considering a loan refinance a must for any person planning on staying intheir home for at least a few years. Theonly question is whether it makes economic sense to refinance, and upon whatterms and conditions.
In order tounderstand exactly whether it is worth refinancing must you start with the currentcosts of your mortgage. Depending on your interest rate and your anticipatedtime left in the subject home will allow a determination as to whetherrefinance makes economic sense. In addition, in some cases a higher monthlypayment in a move to a shorter amortization could help you build substantialequity in a much shorter time.
For examplehomeowner with a $350,000 first mortgage with an interest rate of 5.25%amortized over thirty years will pay $1,954.45 per month for the remaining termof the mortgage. If that person currently owes $315,000 and is interested in athirty year fixed rate loan, today’s rates of 4.25% will reduce the monthly mortgagepayment to $1,549.61, or $404 per month. Part of the savings is due to the lower principal balance, but most thesavings is due to the lower interest rate.
Interestrates on a fifteen year fixed rate amortization loans are as low as 3.43%.Using our same example, monthly principal and interest payments would increaseto $2,241.07, or about $286.00 per month. However, after five years ofpayments, the fifteen year loan balance would only be $227,384.96, which isapproximately $60,000 less than the loan balance amortized over 30 years at the4.25% rate. The higher monthly paymentwill result in $41,000 in payments over 60 months but you will realize nearly$20,000 greater reduction in the principal balance due to the lower interestrate.
The averageAmerican family moves every seven years. If you are confident that you will notbe in your home more than five years a special 5/1 adjustable-rate mortgage mayactually be the best course of action. Interest rates on 5/1 arms are less than 3%, with a monthly payment overthirty years equal to $1,314.50. That isa savings of over $639.95 per month. Atthe end of five years the amount owed will be approximately $279,010.71. However, if the additional $639.95 is paidwith the mortgage payment, the balance owed will only be $236,982.74.
With costs ofapproximately $5,000, any refinance is not cheap. If the borrower is going to replace anexisting thirty year loan with a new thirty year loan it will take nearly fourteenmonths of lower-cost loan payments to simply make up the cost of the refinance.That is why it is crucial to determine how long you will stay in the home tosee if the cost of refinance is worth the lower interest rate. If the loan hasan additional point or two, it will take nearly eight months per point to makeup the difference.
Manyhomeowners simply ignore the benefit of refinancing and continue to paymortgage payments on loans with interest rates over 5%. Some have rates as highsix or seven percent, and converting to a lower rate loan today would result ineven greater savings. Take the time to check your loan rate and determinewhether it makes financial sense for you to seek a loan refinance at this time.There are many quality mortgage brokers who will assist you in reviewing yoursavings at no cost to you so you can determine whether it makes financial sensefor you to refinance your home.
Michael Posner, Esq.,is a partner in Ward Damon a mid-sized real estate and business oriented lawfirm serving all of South Florida, with offices in Palm Beach County. They specialize in mortgage loans, and canassist borrowers and banks in all loan matters. They can be reached at 561.842.3000 or at www.warddamon.com
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