Joe's Blog

        There are a number of things to consider when considering refinancing.  The two main things borrowers need to consider are the costs of the new loan relative to the monthly savings and the term of the new loan.

                            Costs versus savings

       As a general rule, borrowers should be able to recoup the costs of a refinance in the first two years of the new loan.  So take the following example:  The borrower has a current loan of 350,000 at a rate of 5.75 percent.  His or current payment is 2042 dollars.  He is now offered a loan for 357,000 dollars at a rate of 4.75 percent and the new payment is 1862 dollars.  The saving is 180 dollars per month at a cost of a 7,000 dollar increase to the existing loan amount.  So, if you divide 7,000 by 180, which is the savings per month, the borrower will recoup his money in the 4th year he has the loan.  Most experts will recommend that borrowers attempt to recoup the costs to refinance within a 24 month period.  In short, generally speaking, the lower the time to recoup the costs of a refinance, the better you are.

                                Reducing your term

        By far, the best way to save money when refinancing is to reduce your term while taking advantage of the lower interest rates.  Additionally, lenders offer better rates for shorter terms.  So, in the above example using 350,000 as the loan amount, let's say the borrower is offered 4.75 for a 30 year fixed loan and 4.5 percent for a 20 year fixed.  The 30 year payment is 1825.77 per month and the 20 year payment is 2214.27.  Now, let's do the math.  30 years is 360 months times 1825.77 which is 657,277 dollars.  20 years, which is 240 months times 2214.27 is 531,424 dollars for the life of the loan.  So the 20 year mortgage represents a whopping 125,915 dollars savings over the 30 year.  Now, this type of savings makes sense.