 |
|
When refinancing hurts you
If you fall short of the break-even point, refinancing your mortgage costs you money. In that case, it may not be a good idea.
Let's say you bought your house five years ago, borrowing $125,000 at a 10% fixed rate for 30 years. Mortgage loan rates have since dropped and you're thinking of refinancing in order to cut your monthly P+I payments, which are currently $1,097. Your current loan balance is $120,718.
Your lender qualifies you for an 8% interest rate, which cuts your monthly payment to $932, from the table below:
| Years Left |
Loan Balance |
9% |
8% |
7% |
| 25 |
$120,718 |
$1,013 |
$932 |
$853 |
| 20 |
$113,673 |
$1,023 |
$951 |
$881 |
| 15 |
$102,083 |
$1,035 |
$976 |
$918 |
| 10 |
$83,012 |
$1,052 |
$1,007 |
$964 |
|
Not only do you save $165 ($1,097 - $932) in monthly payments, you also can invest those savings at some saving interest rate, which you estimate to be 6%. You estimate that your total closing costs will be $5,000.
There's an additional hitch -- you expect a job transfer to another city within a year, forcing you to sell your home. You will want to run the numbers to determine whether this scenario will get you to the break-even point. Depending on the probability of your relocation, you may wish to reconsider refinancing for now.
Next Topic: Deciding to refinance
|
|
|
