refinance for a variety of reasons, there
isn't one answer to this question. You may
wish to obtain a lower interest rate and
likely, a lower monthly payment. Perhaps you
want to refinance to reduce the term of your
current mortgage or convert a fixed-rate
mortgage to an adjustable rate, or
vice-versa. Finally, you may want to
exchange the equity in your home for cash to
make home improvements, consolidate debt or
to pay for college tuition.
Whatever your reason, we believe a
thorough review of your needs and your
current mortgage is required. Part of this
process includes considering the following
1. The interest rate and term of the
2. The current interest rates available.
3. The cost to refinance.
4. The length of time you plan to stay in
5. Your current income and credit status.
6. Any pre-payment penalties on your current
Refinancing is simply the process of
taking out a new mortgage, and using the
money obtained to pay and close your current
mortgage. Refinancing may include many of
the same steps that were involved in
applying for and obtaining your existing
mortgage. This includes having to pay
closing costs and perhaps establishing a new
escrow account. The balance of your existing
escrow account is reimbursed to you after
the closing of your new mortgage.
When refinancing, there are basically two
options. One option is a rate & term
refinance. You will likely choose this
option if you wish to lower your interest
rate, monthly payment or to change term of
your loan. When you consolidate debt (credit
cards, car loans, etc.) or exchange equity
from you home it is called a cash-out
In the case of a rate & term refinance,
simply obtaining a lower rate may not
necessarily provide a financial benefit.
While a monthly savings will likely be
realized, you must consider the cost to
obtain that savings.
For example, assume you want to refinance
an existing mortgage with a balance of
$113,112. The current monthly principal and
interest payment is $830.06 (based on 7.5%
for 30 years with an original mortgage of
You now have the opportunity to refinance
the existing balance at 7.25% for 30 years.
The closing costs for this will be
approximately $1200, in addition to prepaid
interest and the cost to reestablish your
escrow account. The lower interest rate and
the lower loan amount will reduce the
monthly principal and interest payment to
$771.69, saving you $58.37 per month!
Before refinancing under this example
however, you should consider how long you
intend to stay in the home. This is
important as it relates to the "break-even"
point. Let's assume you plan to sell the
home in 18 months. As indicated in the
example above, you will realize a monthly
savings of $58.37 by refinancing. The
approximate cost to refinance in this
example is $1200 (your costs may be higher
or lower depending on your situation). To
calculate the break-even point, divide the
monthly savings into the closing costs. In
our example, the break-even point is 20.5
months. Given your plan to sell the home
within 18 months, refinancing simply to
lower your rate may not provide a benefit.
Now let's review the same example but
consider that your existing mortgage
includes private mortgage insurance and that
payment is $52 per month in addition to the
principal and interest payment of $830.06.
Let's assume that the refinance mortgage
amount is now 80% percent (or less) of your
homes value. This would eliminate the
requirement of private mortgage insurance
thereby saving you $110.37 per month. This
savings reduces the break-even point to 10.9
months! Refinancing may now be a prudent
Please note, it is not necessary to
refinance a mortgage to eliminate private
mortgage insurance. If you believe you have
reduced your loan-to-value to 80% or less,
contact your lender regarding their policy
to remove private mortgage insurance from
108 N. State St. St
Sparta, MI 49345