Refinancing, Breaking Even and Saving Money

by James & Miel on January 23, 2009 · 0 comments

Hi All,

Unless you’ve been living in Mars, you probably know that that the federal reserve has lowered interest rates to stimulate the economy. This means, its time to think about refinancing your mortgage. But, before you rush off to your lender, here are a few things to consider.

First, you’ve got to determine if its worth it. Doing a refinance deal can be expensive. Lenders often charge up to 3% of your loan to use their money. The way to think about if it make sense to refinance is to calculate your break even point. Lets go though an example: assume you owe $300,000 at 6.5%. At 6.5%, you’d have to pay $2,333.70 each month. But if you refinanced at 5.5%, your payments would be reduced to $2,140.87 – a savings of $193 per month. Assuming your refinancing costs are 3% of the loan, then you’d have to pay $9,000 to do the deal.

Your break even point is your cost/your monthly savings. Or, in this case, $9,000/$193, or 46.6 months. In this example, you’d break even in 3 years and 10 months. What is a good break even point? Its subjective and it depends on your own situation. However, if you do refinance you’ll probably want to lower your the overall price of the deal by reducing closing costs.

How do you save money on closing costs? There are a couple of ways to do this. First, you can shop around or you can bargain. In both situations, the consumer is at a disadvantage.

Shopping Around: Typically what happens is you’ll get on the telephone and start calling lenders to get their information on rates. However, its inherently hard to price compare loan programs. Interest rates change daily, and there are often differences in the types of loan programs that you’ll be quoted. Its not like televisions or ipods. However you can get a sense of what typical charges are if you ask enough questions.

Bargaining: Federal law dictates that lenders have to give you a good faith estimate within three days of your refinance closing. However, in reality most banks don’t get their costs to the closing company in time. This situation invites price gouging and means you usually don’t have time to gather the info you need to bargain effectively. In addition, there is often social pressure not to “rock the boat” at closing. For example, your closing agent may pressure you not to question their fees. Closing typically occurs after a lot of effort by all parties involved, so some feel obligated not to ask for a price reduction.

So, how do you save money when the social situation is structured against you? Two things, First, ask around so you know how much you should be paying in closing costs. This way you’ll be prepared to deal with last minute sticker shock. Second, ask for a discount and be prepared to walk out. Don’t forget, nobody in a refinance gets paid unless you give your signature.



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