When Should You Refinance Your Mortgage?

To build wealth in real estate you need to know when a good time to refinance your mortgage is. Getting a good rate and at a low cost helps build equity fast and increases cash flow. The general rule has been if you can get two points below your current rate then that is a good time. Well, one thing about the financial industry is that the rules are always changing, and I am breaking the rules and you should too as part of your wealth building strategy.

Here is why.

I got a call from a loan officer saying that the interest rates on my home loan had fallen and that I should consider a refinance now.  By the time I discussed it with my husband and ran the numbers to see when we would break even on fees, the rate had gone up. I missed my window of opportunity. Stubbornly I figured I will wait it out until I got the rate I wanted. Well, it took close to two years for the rate to fall a little more than 1% below what I am paying now (the rate I wanted). This meant a substantial drop in my monthly mortgage payment so I jumped on it to find out more. I chose a 5/1 ARM tied to the LIBOR with a 2.25% margin and had 0 points and I would pay closing fees. (Remember, there is no such thing as a 0 point 0 fee loan, or a free lunch. They just bundle it into the loan but you will pay.)

Let’s take a closer look at those closing costs:

Appraisal $665
Credit Check $6
Processing fee $550
Flood Clearance $20
Title -$1781

That is a total of $3,022.

This lender allows me to use my own title company so I chose EntitleDirect, so my title only costs me $845.  My total cost now is only $2086, a savings of $936.  Woo-Hoo!

Let’s assume for example that my new mortgage would be $1,000 a month and my old mortgage was $1,500 a month, it would take three months before I would start to save money on my mortgage after I have recouped the fees.

Be wary. The mortgage industry needs to make it easier for people to understand why they should refinance and the costs involved instead of just selling the public on the lowest rates.

I hope this example has helped you understand the structure of how to figure out if a refinance is right for you and when you can save money net of the fees. This wealth building strategy also applies to rental homes, and second homes.

About the author

Fern Alix LaRocca CFP® EA

2 Comments

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  • Hi Elaine,
    Think of it this way:
    You put out $4,000
    You get back $100 a month.
    How many $100 does it take before you recoup what you put out?
    40 months (or 12 Months in a year) or a little over 3 years before you will actually save any money on that refinance.

    Do you think that makes sense to invest $4,000 into something that won’t pay off in more than 3 years?

    Warmly,
    Fern

  • My husband wants to refinance from a 5.125% to a 4.75% with a savings of $100 per month.The cost would be approximately $4000. We refinanced about 3 years ago, does this make sense? He is retired and does not work and we have credit card debt.

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