Ask Stacy: Should I Refinance My Mortgage?

While deciding whether to refinance your mortgage may seem mysterious, when you boil it down, it’s just simple math.

Here’s a recent reader question – maybe you’ve wondered about it as well:

My bank called and offered me to refinance at no charge: no appraisal fee, no refinance fee for a rate of 4.5 percent. My current rate is 5.375 percent, and I have had this mortgage since 2008. My principal is $144,423, and I’m paying about $192 in principal each month and $647 in interest.

Anyway, would that make sense for me to do this refi? The only catch is that my 30-year fixed loan would start over now – so I’ve been paying already for 2 1/2 years, which would mean I start from scratch again.

What’s more beneficial for me? The difference in price each month is about $100 less if I get the refi at 4.5 percent. They are also offering me to get a 20-year fixed loan at 4.5 percent, which would increase my monthly payments but decrease the payment overall. What should I do? – Corinne

Corinne, here’s how you – and anyone else in your situation – can figure out the refinance question. Basically, it’s a matter of cost vs. benefit. In other words, divide the cost of the refinance by the monthly benefit you’ll receive, then see how many months it will take to make the transaction profitable.

For example…

If the fees you pay to refinance are $2,000, and you save $100/month as a result, it will take 20 months to recoup your cost. If you’re going to stay in the house exactly 20 months, you break even. If you move sooner than that, you lose money. For every month you stay longer, you come out $100 ahead.

Now at this point, you may be thinking I didn’t read Corrine’s question very well. After all, she plainly says “My bank called and offered me to refinance at no charge: no appraisal fee, no refinance fee.” But there’s almost no such thing as a fee-free refinance. I can use myself as an example – I refinanced my mortgage a couple of years ago. Here are the expenses I paid:

Recording Fees $175.00
City/County Tax Stamps $ 600.00
State Tax Stamps: $1,050.00
Credit report: $25.00
Underwriting Fees: $595.00
Escrow Fee: $150.00
Title Search $165.00
Title Insurance: $1,125.00
Title Endorsements: $140.00
Express Mail: $75.00
Total Expenses: $4,100.00

I did lots of negotiating to keep my expenses low (see Mortgage Shopping 101 – Negotiating) and for the most part I was pretty successful.: The fee associated with the actual mortgage loan – the underwriting fee – was $595.00. But as you can see from the above list, that’s not all there is. In my state (Florida) there’s no negotiating title fees and tax stamps and there’s no getting around them: they’re set by law.

The point is that Corine needs to be aware of the entire cost of refinancing her mortgage and not rely on the bank’s claim that they’re refinancing her at no charge.

In addition, there could be a very high charge in this refinance that’s virtually invisible – the interest rate that Corinne is agreeing to pay for the next 30 years. If rates are currently 4.25 percent and Corinne’s rate is 4.5 percent, that’s money that the lender is making and Corinne is losing. And that’s why you’ll often see lenders that offer “no-fee” mortgages: sure, there’s no underwriting fee, like the one I paid. But these loans are often at higher-than-market rates, which results in the lender making a lot more than if they’d charged $595.

Bottom line? If you’re considering a refinance, go into it with your eyes fully open. Find out how much it will actually cost to refinance a mortgage where you live, including government and closing costs. Then, check out a mortgage search tool like the one we have here to find the absolute best rate. Then make your decision.

As far as a shorter mortgage – 20 years instead of 30 – the shorter mortgage, the less interest you pay over the life of the loan. (Same goes for any loan, like a car loan.)

The shortest loan you can afford to make payments on is the best. Of course, your payments will be higher. And if you get the longer loan, nothing stops you from paying extra every month should you have the cash on hand.

Stacy Johnson

It's not the usual blah, blah, blah

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  • Anonymous

    Just curious – why do you think that a bank would be so aggressive in soliciting re-financing if they aren’t getting much (financially) out of it?

  • Anonymous

    It’s not quite that simple…

    I’m a loan officer and I love it when I hear my clients tell me they’re happy paying more than the current rate because they don’t want to reset the clock or pay me the fees.

    The cost of money will almost always make a refi worth doing!

    Here’s what I suggest they do. Take their savings each month and use it to pay down their principal. In almost every case this will save them interest over the life of the loan AND shorten the term of the loan!

    I have a worksheet I use to demonstrate this to them with. This assumes the original loan amount was 250,000 @ 5.50% and it’s aged 60 months. The refi offer is the same as above “no cost” meaning all the fees are paid with the yield spread. The borrower has to take the savings and use it to pay down their principal each month. I have them do this through automatic payments so they don’t fudge it.

    Original Balance 250,000
    Rate 5.25%
    PMT 1,381
    Months Aged 60
    Current Balance 230,374

    New Balance 230,374
    Rate 4.50%
    PMT 1,167
    PMT Savings 214
    Lifetime Savings 51,559
    Term Shortened by Mos 37

    BTW – I love this site. All my clients will hear about this, it’s awesome!

  • Darling

    This article and string are pretty dated, but I hope someone can shed some light on a twist to this topic. My wife and I are considering a refi. My score is higher than hers (763 vs 695). If we refinance in my name only, the bank will credit us $4320 towards fees (VA fees along with others). We would end up recouping our money in about 4 months vs 17 months if we keep both our names on the loan. We expect to be in the house at least another 48 months.
    We believe having the home loan in both of our names is a benefit to her which will improve her credit score. Looking at the score criteria, however, there is nothing listed indicating a benefit for a home loan, a large loan, or diversity of loans.
    Aside from the home loan, we have 5 credit cards totaling ~$70K of revolving credit. We sit at ~14% debt ratio. We also have a consumer loan with $6 balance and a car loan with $18K balance.
    My question is, how beneficial is it to have a home loan on your credit report? To quantify that, is it worth $4320 to keep my spouse on the loan?
    Thanks for any help you can offer!

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