Refinance the mortgage or not? It’s not always the best.

The many mortgage brokers that call me all tell me the same thing, with interest rates as low as they are now and by the way they are only going to go up, isn’t it time for you to refinance and lock in that new low rate?

What they don’t tell you is that more than half of the refinance candidates would be better off financially not refinancing.  The brokers get paid on every refi so asking them if it is beneficial to you to refinance is not the best advice.  The mortgage professionals typically point out the low interest rate and the lower monthly payment but nothing else.  They don’t tell you that if you are refinancing a twenty-seven year mortgage that you are increasing your payments by three years!!  Also, when the broker is talking they often say that the refinance will be no out of pocket expense to you and you are thinking cool, no cost.  But that is misleading.  The costs are often rolled into the mortgage balance.

Most folks when looking at whether they should refinance or not look at only the interest rate and the lower monthly payment.  And most often the decision is made on just the monthly payment reduction.  Even the refinance calculators do not show you the total costs of a refinance.  All they give you is the monthly payment savings amount and then divide that by the cost of the refi and then in summary give you the number of months to recoup the initial cost.  That always is some number of months so that calculation always shows you that it is beneficial to refinance (assuming the new monthly payment is lower than the original payment).

They conveniently forget to show you that now your mortgage term is now longer and so your overall cost over the life of your loan is higher.  But if you look at the longer duration of the mortgage and take the mortgage payment and times it by the increased number of payments you get a rather large number.  But since you have a monthly payment savings you divide that large number by the monthly savings to get a number of months it will take to break even.  So it would make sense to refinance to a lower interest rate loan if you plan on keeping your loan longer than the break even point.

If you are familiar with United First Financial MMA program there is one other calculation that can be done to insure that it would be beneficial to refinance or not.  Your agent can run the new numbers through the Analysis software.  The Analysis takes into account the lower interest rate, the longer mortgage duration, and the increased cash flow created by the monthly savings rate.  Then and only then can you be sure the refinance would be beneficial.

Don’t be taken by a lower monthly payment.  Always ask for the TOTAL COSTS.

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26 Responses to “Refinance the mortgage or not? It’s not always the best.”

  1. Joe Brady Says:

    Rose:

    Thank you for posting some common sense information regarding refinancing. In most cases, it is the absolute worst thing that a person can or should do! If you’d like an example with some real numbers, you could visit my Blog article: http://jabfinancial.com/2009/02/02/refinance-or-dont-refinance-that-is-the-question/

    Also thank you for spreading the word about United First Financial and the amazing Money Merge Account system that they offer! I believe it will be the salvation of the American people’s debt crisis.

    Joe

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