Question: Hi, I live in San Diego and i found a good site where i can apply for re financing and then i get several offers in my email from banks and i can just pick the best deal for me. http://www.fast-personal-loans.nzso.com But the site didnt have any info on the best time to consider refinancing, when should i consider refinancing my home loan?
Answer: You should re-fi when you (a) can get a better loan than what you currently have and (b) the cost of the re-fi can be recovered in a reasonable period of time.
A part (a) for example…you have a 30 year 8% loan with 24 years remaining. You are offered a new 30 year loan at 5.25%, then consider taking it. If you are offered at 7.5%, there likely isn’t enough savings to make it worth while.
Part (b) is a little more complicated. First, you need to ask for a HUD statement (also called a “good faith estimate”). This will list all closing costs and expenses required to get the new loan. Find the bottom line number for closing costs. For this example, lets assume that it is $3750 in closing costs. Next, compute how much you will save per month with the new loan. The formula is (old_rate – new-rate) * loan_balance / 100. For example, if you have a $125,000 loan balance, your old loan in 7.5%, and your new loan is 5.5%, you have (7.5 – 5.5) * 125000 / 100 = $2500. To find your break even point, take $3750 / 2500 * 12 = 18 months. If you plan to stay in this house at least 18 months, then it makes sense to re-fi using these example numbers. If you plan to sell before then, you will not break even in the re-fi.
One point of caution is that many of these loan vendors, especially the shady ones, are going to simply point to having a lower monthly payment and tell you that you have all kinds of savings. This is often a numbers game. You can always make the payments lower by making the loan longer, or resetting yourself back to a 30 year loan. In reality, you end up paying far more in the long run due to accumulated interest than what you will ever save on monthly payments. Don’t fall for this trap. If you have any questions here, please post back with the loan details, and we can run the numbers for you to tell you if it is a good deal or not.
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