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Personal Finance

Decision Time: Refi Right for You?

House Real Estate 01


Dear Dr. Don,
I was thinking about moving in the next two to three years. Is refinancing my house a good idea? I can get it 1% lower than my current rate, and there are no prepayment penalties with my current loan.
-- John Jump

Dear John,

The shorter the time span, the harder it is to justify refinancing. That's in large part because you have to be in the house long enough to recoup the costs associated with refinancing. Be cautious in chasing down "low cost" or "no cost" refinancing. Often that means that the cost is baked into either the principal amount or the interest rate. The Bankrate feature, "Is no-closing-cost mortgage for you?," provides additional detail.

Bankrate's 2010 Closing Costs Study reported, "On average, the origination and third-party fees on a $200,000 purchase mortgage added up to $3,741 in this year's survey." Yours is a refinancing, so the costs may be lower than a new purchase mortgage.

You didn't give me numbers, so I made up a few of my own. You can use Bankrate's mortgage calculator to put together your own table:

Refinance option
  Existing mortgage Refinancing Difference
Loan amount: $165,000.00 $165,000.00  
Interest rate: 5% 4%  
Loan term (months): 180 180  
Payment: $1,304.81 $1,220.49 $84.32
Total interest (loan term): $69,865.71 $54,687.31 $15,178.40
Total interest, next two years: $15,767.92 $12,567.81 $3,200.11
Total interest, next three years: $23,050.34 $18,337.29 $4,713.05

Alternately you can try one of Bankrate's refinancing calculators. I like the mortgage refinance break-even calculator, because it looks at the break-even point for refinancing from four different points of view.

Bank Rates

Loan Type Graph Rate +/- Last Week
30 Y Fixed Graph 3.84% dw 3.85%  
15 Y Fixed Graph 2.87% dw 2.92%  
30 Y Fixed Jumbo Graph 4.14% dw 4.22%  
5/1 ARM Graph 3.05% up 3.02%  
5/1 Jumbo ARM Graph 3.57% dw 3.58%  
Loan Type Graph Rate +/- Last Week
$30K HELOC Graph 4.44% up 4.43%  
$50K HELOC Graph 4.04% up 3.90%  
$30K Loan Graph 4.55% dw 4.57%  
$50K Loan Graph 4.16% dw 4.17%  
$75K Loan Graph 4.16% dw 4.17%  
Loan Type Graph Rate +/- Last Week
36 M New Graph 3.09% dw 3.10%  
36 M Used Graph 3.31% dw 3.32%  
48 M New Graph 3.16% dw 3.18%  
48 M Used Graph 2.85% dw 2.88%  
60 M New Graph 3.10% dw 3.11%  
Loan Type Graph Yield +/- Last Week
6 month Graph 0.37% up 0.36%  
1 yr Graph 0.61% -- 0.61%  
5 yr Graph 1.46% up 1.45%