HLM Mortgage Blog

So, you've just left a dinner party where someone was bragging about refinancing and getting a 4.5% interest rate.  Your rate is much higher than this and you wonder if it makes sense for you to refinance.  After all, you have to keep up with the Joneses right?  I'd like to provide you with a few simple tools to help you figure out if refinancing is in your best interest.

1)  How long do you plan on owning the home? 

If you plan on moving within the next 3 years, it most likely does not make sense to refinance.  If you are not in the home long enough to recover the closing costs (in the form of a lower payment), a refinance will not make sense for you.

2)  How much will you save? 

The whole idea behind a refinance is to save money.  In order to calculate your payment savings, you will want to get your most recent mortgage statement and figure out how much of your payment is going toward principal and interest (exclude the escrows for taxes and insurance for now).  Then take the current balance on your mortgage and multiply the dollar amount (in thousands) that you owe times 5.29 and this will tell you your new payment amount.  For example, if you owe $200,000, multiply 200 times 5.29 and this gives you your principal and interest payment.  Then, compare the new payment with your current (principal and interest portion only) payment to see how much you will save monthly.  Please note this 5.29 factor is based on the interest rate of 4.875% (current 30 year interest rate at the time this blog is being published). 

3)  How much will it cost you to refinance and what is your "Break Even Point"?

The amount of closing costs for a loan depend on both the loan amount and the interest rate you choose.  Higher loan amounts (up to a $417,000 loan size) typically carry lower interest rates than smaller loan amounts.  Also, higher loan amounts usually result in a quicker break even point because the interest savings is more with a higher loan size.  Typically closing costs are approximately $2200.00 plus 1.25% of the loan amount (you may decide to choose a slightly higher interest rate that will reduce the 1.25% portion of the closing costs).  So, after calculating the total amount of closing costs, divide this by your monthly payment savings (from # 2 above) to determine your "Break Even Point".  As long as this figure is less than your estimated time in the home, you will want to look into this further.  Naturally, if you have a larger loan balance, you won't have to see a very large drop in interest rate for it to make sense (because even a small drop in rate can have a bigger impact on the payment on larger loan balances). 

To see if it makes sense for you to refinance, please call Jason at 404-210-6663 or send him an e-mail at jasonconn@hlmmortgage.com.