Should I refinance my mortgage to save $50/month?

Question

I bought a new house 2 months ago. My "mortgage guy" left me a message suggesting a re-fi.

I refinanced my previous house with this same guy probably 6 - 8 times over a period of 3-4 years, each time saving between $25 and $50/month. That all sounds good. I knocked my payment down some over the years.

What always had me questioning whether it was a good idea was that the term always stayed at 30 years, so even though my payment was lower, I felt like I was back at square one in terms of paying off the loan or building equity. Am I off base?

Or is it a moot point because in the end I sold the other house and paid off the loan while enjoying lower monthly payments? If I had kept the orginal loan, would I have built up more equity? Its probably impossible to answer without know the specifics of my loan amounts an interest rates.

Is there a formula that can help me make the decision on whether to refinance and reset the term or to just keep on with the current loan?

Should have mentioned that all the re-fi's have been 0 points 0$ costs.

Answer 1

When you refi, you are essentially starting over, but you are not losing any equity you've built up.

Refinancing is simply taking whatever liability remains on your mortgage, and paying it off with a new loan at a (presumably) lower interest rate. The new mortgage can be 30 years, or 15, or whatever agreement you make with the lender. As long as the interest rate is lower, and the amount you are borrowing on the refi is the same or less then the liability on your mortgage, you are saving money.

BTW - $50.00 over 30 years is $18,000. If refinancing isn't costing you anything, then I'd do it!

Answer 2

The short, general answer is no, you're not off base -- every time you refi, you start the time-to-ownership clock at 30 years again.

Now, this may not be a bad thing if you're trading up regularly -- that is, you buy a house, let it appreciate, sell it for more money and buy a nicer house. If you're doing this and using any overpayment to build equity faster, that's okay; at least the overpayment reduces the amount of the mortgage and increases your equity that much more quickly.

However, if you find the house you really want to live in for the rest of your life, then refinancing may NOT be such a good idea because it effectively neutralizes the term-reduction effect of all your early payments. Yes, on the face of it you're refinancing a smaller loan amount because you've paid it down; but in reality, a refinance after several years is almost always calculated based on the appreciated value anyway, so it's often at a higher principal than your initial loan. And if you are overpaying with an eye toward owning your home that much sooner, you've shot yourself in the foot because instead of owning the home in 14 or 16 years, you've pushed it back out to 30.

The big exceptions to this are when interest rates take a huge drop, or if you have an adjustable-rate mortgage (ARM). In these cases, being able to drop your mortgage payment by a couple hundred dollars could make a huge difference overall, especially if you keep paying the original, higher amount -- that's the best of both worlds, because your cash flow stays the same but you can save tens of thousands of dollars in interest, and finish a 30-year term in 14 or 16 years.

Answer 3

As Jason M suggests... you need to do some checking to find out what the (new/refi) mortgage **really** costs. There's no such thing as a "free" one.

Understand that every time you refi, the mortgage broker/agent is making at least several hundred bucks on the transaction (possibly quite a bit more). That's why he keeps calling and suggesting you refi again and again... it's another paycheck for him!

Now if he's getting paid (and he *IS*) and the money isn't coming out of your pocket, then either:

1) it's getting added to your mortgage principal each time, or
2) the mortgage broker is "selling" you an above-market rate mortgage... meaning that you're paying too high an interest rate, and the lender will pay the broker some kind of origination bonus because the lender likes to be paid an above market interest rate

You need to talk to a couple of different mortgage brokers / lenders and get competitive quotes. Ask each of them for a "good faith estimate" that shows all of the loan costs, and the APR. Look on bankrate.com to find some lenders that do business in your area.

Just remember, it's never, ever free. It costs the broker money to "originate" your loan (even if it's a refi), and he's gotta get paid. The cost is buried in there somewhere, and if he's telling you "don't worry, it's free"... he's just hiding it from you.

Answer 4

No. No. and No. To save $500/yr is not worth it. Who paid for the $300 appraisal? Who paid for the title insurance which is a percentage of the refinance (at least $350? (mine was $725) Who paid the escrow fees?

Those fees and others were probably tacked on to the back end of your home loan. In other words, you wanted to refi a balance of $100K and when all was said and done, your new mortgage amount is now $104K.

I'd check your payoff amount from the last refi and compare that to your CURRENT pay off. Stop refinancing and pay off the mortgage early.

REFINANCE when you can reduce your interest rate by 2%. and NEVER REFI when you plan on selling w/in 4 yrs.

Answer 5

Even at zero points it's a lot of hassle unless you're saving at least $150 a month. Call a few places or play with an online mortgage calculator. I wouldn't do it for $50....

Answer 6

there is not really formula when to refinance , but even you thing, you not paying nothing for refinancing- please check on your last refinancing closing cost your mortgage balance you were paying to your old lender and your new loan amount.
i really don't like this guy who refinance you every couple mth, because over 3-4 years rate was not changing that much .

Answer 7

Is it really $0 cost? Or are they just adding the cost to your mortgage balance? If the latter, you need to figure out how much it's really costing, and figure out how many months of $50 savings it would take to break even.