This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Tuesday, January 20, 2009

Is it time to refinance?

Posted By Paul

So you've probably been hearing about the historic mortgage rates, and maybe you have been thinking about refinancing.

Well since I've been looking into it myself I thought I would share what I've learned from the process.

Before calling up a lender, there are a few items that are good to get clear in your head:

1) Your refinancing goal: Do you want to pay less interest in the long run? Do you want to pay off your house more quickly? Do you want to lower your monthly payment? It's important to be clear on these questions since various refinancing choices (or for that matter whether or not you should refinance) often come down to your refinance goal.

2) The timeline for your house: It's so hard to predict, but if you can make a guess as to how long you plan on staying in your house it helps make various decisions easier.

So if you have these items clear in your head, now what?

At that point you can call a mortgage person and have them run some numbers for you. Keep in mind that usually the way the whole thing works is that you refinance (which includes fees) and the good news is that you get a the new rate, but the bad news is that you pay the fees. You can of course roll the fees into the principal of your mortgage, that means no out of pocket costs to you (which is good) but the amount of principal you owe on your mortgage just went up (which is bad).

There are lots of mortgage calculators out there, some of which are specific to refinancing. Here is a page with a lot of them:


I like the 'Simple Mortgage Refinance Calculator'. It asks you for the basic numbers of your refinance and then calculates your payment change and the number of months before the interest savings offsets the closing costs.

Where I am personally coming from in this refinance is that in these uncertain economic times, I'd like to lower my monthly payment. The refinance is a trade off for me. By refinancing I reset the clock on my mortgage (I'm now scheduled to pay off my house in 2038 if I stick to the payment schedule), and the fees (which I am rolling into the loan) makes the amount I owe go up slightly.

However my wife and I talked it over and we decided that in these uncertain times the fact that our required monthly payment goes down is worth it. We figure that we can always pay extra to the mortgage. In fact our plan is to continue to pay the "pre-refi" amount every month and just apply the extra towards the principal. The nice thing is that if things ever get dicey (like I get laid off or some other big expense comes up), we can always stop paying the extra.

We toyed with the idea of refinancing at a 15 year mortgage, but even with the better interest rate our payment would go up a good bit, and that just isn't our priority right now.

Lots of choices in refinancing, it really helps to figure out a few basic questions to guide you as you run the numbers.

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