The main question asked when considering a refinance of a home loan, is when do I refinance? When does it make sense to spend the money to lower my interest rate? The answer varies depending upon your individual circumstances and whether you are looking to refinance in order to lower your monthly payments and interest rate or change the term of your mortgage in the form of a “rate and term” refinance or to take cash out of your home in the form of a “cash out” refinance. The following sections should help you decide which applies to you and what to look for when considering a refinance and shopping for loan programs. As always, we encourage you to call us at anytime in order to discuss the feasibility of refinancing your home and looking at your particular situation in detail.

Rate and Term Refinance

A Rate and Term Refinance simply means a refinance in which your current loan is paid off and replaced with a new loan at different terms and/or interest rate. Closing costs and pre-paid items can be included in this loan or “rolled into” the loan amount meaning that you do not physically come out of pocket to pay these fees, or they can be paid out of your pocket at closing.

In terms of feasibility, the goal is to lower your monthly payments and interest rate enough to offset the costs incurred in refinancing. This is called the “recapture” time or “break even point”.

For instance, if the closing costs involved in the refinance are $3,000 and your monthly payment will be reduced by $100 per month, the recapture time is 30 months (3,000 ÷ 100 = 30). This means that you will truly be realizing the monthly savings after 30 months. When looking at your monthly budget, if you are able to save $100 per month or $1200 per year without spending any cash out of pocket, often times that is very appealing. However, if you are not planning on being in the loan/home for at least 30 months, a different loan program with a shorter recapture time may be needed.

You may also consider changing the term of your mortgage loan. For instance, you may want to go from an adjustable rate mortgage to a fixed rate mortgage or from 30 year fixed rate to a 15 year fixed rate. Although the monthly payment may not be lowered, the overall interest savings may be large enough to warrant doing the refinance. For instance, if you are at an 8.5% 30 year fixed rate and go to a 6.5% 15 year fixed rate on a $100,000 loan, the payment actually would increase by $102.20, but you would actually save $2000 per year in interest. As we can offer many different packages for rate and term refinances, the goal is to find the right program that offers a recapture time that makes sense for your particular situation.

Cash Out Refinances

A Cash Out Refinance is a refinance in which the equity built up in the home is taken out and given to you in cash. This is done for many reasons including to pay off higher interest rate credit card debt, to do home improvements, or just to invest that money in higher yielding financial options. The closing costs and pre-paid items incurred are taken from the cash out proceeds from the transaction. Low or No Cost Refinances are also available.

When paying off other debt with the proceeds from a cash out refinance, one must compare the overall savings when looking at the “recapture” period. The monthly mortgage payments may increase with taking a larger loan amount, but when compared to what the existing mortgage payments and other debt payments are, often times the total monthly savings drastically lowers the overall monthly expense. The added tax benefit due to the deductibility of the mortgage interest is also something to consider. For instance, if your monthly mortgage payment is $1000 and your credit card debt adds up to an additional $1000 per month, you may be able to do a cash out refinance and increase your monthly mortgage payment to $1500 but also eliminate your monthly credit card debt. This would be a savings of $500 per month. If the closing costs were $3,000, then the recapture time would be 6 months. As long as you stay in the loan/home for at least 6 months, the refinance would be financially beneficial.