19 May 2009 -  Jacksonville, Florida USA                                        

 

Part 1 - When Is Refinancing Make Sense To You?

 

With the interest rates for 30-year fixed mortgages floating around to a 4 to 5 % level, the lowest has ever been since I was born? It may make sense to consider refinancing your 6+% current mortgage interest rate let alone if you have an adjustable rate mortgage (ARM).

First and foremost, the so called “expert” people in the lending industry told me the old rule of thumb is, “refinancing only makes sense if you can lower your interest rate by 2% or more”. Well, I believe that but the word “only” didn’t impede me from digging into refinancing issue a little deeper especially after all we have been through with our current mortgage lender.

Ok, I am definitely not an expert in any field of study more so on how people do business here in America but you see I am no longer the type of person who just sit back and submit myself to other people’s proficiency or abide by their own way of dealing business…never again.     In this day and age, you’ve got to learn how to play the game otherwise you’re always going to end up a loser.

Imagine in just a span of 4 years, our house mortgage was sold not just to two but three different mortgage lenders and during last year’s transition period, the extra payments we made every month which were supposed to go to the principal were re-directed to our escrow account and then at the end of the year, the lender turned around and refunded us the money which was equivalent to one month worth of extra mortgage payment.

An escrow is the account where the mortgage lender held certain amount of fund they collected from the borrowers to pay for their property tax and house hazard insurance premium at the end of every year. 

Can you believe it? All these happened during the transition period and I wasn’t on top of it because I know the $108 dollars extra we pay every month always go to the Principal so I just assumed they’ll continue doing the same thing. I only found out what they did when we received the check in the mail last week of January and when I spoke to Customer Service Representative, I was told that money was in fact a surplus from our escrow account. I was so furious, yelled and cussed the guy so badly!! Boy, are these lenders/bankers smart or just in the business to rip people off?! First, they tank the economy but then the government bailed them out at 0% interest!! And the worst thing is, the US Treasury and the Fed continuously rig the game to guarantee that these companies are going to survive in this financial meltdown. I don’t know about you but I am beginning to doubt Mr. O’s slogan “yes we can; change we can believe in”. I guess I am just tired of senseless wrangling in the government and the politicians’ promises that are often broken!! Yet, I am still hopeful and I pray that the US and the rest of the world will find its’ way out of this global mess even just a bit at a time, but always onward. Well, I better go back to the topic of refinancing before I get so political and hurt some members of my family and friends feelings.

Anyway, while refinancing at a lower rate reduces your monthly mortgage payment but you also have to first consider the closing costs which can be a very substantial amount for you to recover later on. Here's a classic example:

	NEW Refinance	CURRENT Mortgage	DIFFERENCE IN MONTHLY PAYMENT
Loan Amount	$   198,927	$     200,000
Annual Interest Rate	4.250%	5.875%
Term Length (in Years)	30	30
Monthly Payment without Escrow	$978.60	$1,183.08	$204.48

To compute the monthly payment, type this formula on MS Excel
                    =PMT(4.25% /12, 30*12,-198927)
                    =PMT(5.875% /12, 30*12,-200000)

So let’s just say, based on the data given, you’ll be saving $204.48 a month with a new refinanced loan but the total closing costs was $18,527.

This means that you need to keep/stay in your house for at least 90.60 months or 7.6 years just to break even the re-financing expenses.
Formula: ($18,527 divided by 204.48 = 90.60 months) or (90.60 / 12 = 7.6 years)

But there’s more to that than just to recoup your closing cost expenses of course. I’ll give you in the next post, the whole picture of the refinancing numbers complete with series of worksheets from Vertex42 - The guide to Excel in everything that I revised to make it simpler and easier for common people to understand.

Also, it is very, very important to be aware of the “pre-payment penalties” stipulated in your copy of the 'Federal Truth-in-Lending Disclosures' document which was signed by all parties, completed at loan closing/settlement when you first bough your house. Take a look at it before you go further into considering a refinancing.

A prepayment penalty is a provision in your mortgage loan contract with the lender that states that in the event you entirely pay off your loan early, you will have to pay a penalty. This penalty is usually enforced if the loan is being refinanced and not when you sell your house.

According to American Finance, the most common prepayment penalty is six months worth of interest on 80% of the principal balance or it can be 3% of the principal balance. This means that the prepayment penalty on a loan with an outstanding principal balance of $180,000 and an interest rate of 5.875% would be approximately $4,200 and or 3% of 180,000 is $5,000 and this would bring your closing cost to a whopping $20,000!!

Bottom line is Shop around, compare and DO the MATH first. Do not just jump into refinancing just because you see a very attractive low-interest rate mortgage loan. You have to watch out for the catch---the so called hidden fees?!

And a good place to start your research is at www.bankrate.com  but don’t forget to also check out your local credit unions for comparison as well.  I will talk about this topic when I get a chance.

Until next time....