Ask Stacy: Should I Refinance My Mortgage?

Photo (cc) by country_boy_shane

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.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
2-Minute Money Strategy: How Should I Invest My Retirement Savings?
2-Minute Money Strategy: How Should I Invest My Retirement Savings?

If retirement is on the horizon, you can’t afford to take too much risk, but you also need to make as much as possible. Here are your options.

6 Reasons I Will Never Trust Suze Orman
6 Reasons I Will Never Trust Suze Orman

Beware: The self-proclaimed personal finance expert has a track record that suggests more sizzle than steak.

8 Things I Always Buy at Target
8 Things I Always Buy at Target

I grew up shopping at the original Target store and am a lifelong fan. Here are my favorite purchases.

5 Renovations That Can Impact Your Home Insurance
5 Renovations That Can Impact Your Home Insurance

Home improvements can affect your home insurance policy for the better, the worse or both.

The Most Common Reason That Older Adults Fall Down
The Most Common Reason That Older Adults Fall Down

The good news: It’s possible to avoid potentially devastating falls.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

10 Things You Should Never Do With Bleach
10 Things You Should Never Do With Bleach

Does the pandemic have you reaching for bleach more than ever before? Learn the ins and outs of using this powerful disinfectant.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.