Should I refinance?

Recently a customer called me asking, “Should I refinance?“  She had received information in the mail from her bank indicating they could refinance her for a low rate and save her tons of money.  There were a few issues with this offer.

1. The rate being offered was based on where rates were on April 2, 2009.  Rates today are higher than they were then.  This means that an actual refinance today would not be as attractive as what is described below.
2. To meet their example, the customer would have to pay $4,841 in cash fees at closing.  Either of us could roll the fees into the customer’s loan balance, but then the payment would be higher.
3. If the customer made a $860/month payment on a $141,134 loan at 5.5%, their current loan, it would pay off in 325 payments.  The total of the payments would be $279,500 and the interest paid would be $134,366.

If the customer make a lump sum payment of $4,841 (the bank’s closing costs) toward the present loan, it would reduce the balance to $140,293.  If the customer then made payment of $1,138/month (the bank’s payment) on the current loan it would pay off in 183 payments. (3 payments longer than the bank’s proposal).  The total interest paid would be $67,961, for an interest saving of $66,405.

With the loan the bank proposed, the customer would pay $59,706 in interest, plus $4,841 in closing costs for a total of $64,547.  The bank’s loan would save the customer $3,414 (3 payments) over 180 months.  I consider this a minimal savings considering the costs to achieve it and the time it takes to recover the up-front fees.  In addition, the rate the bank advertised probably isn’t available today, so in the end the customer would be spending money for a refinance that gains them nothing.

Yes, the bank shows a big interest savings number compared to the present loan.  Almost all of the savings comes from paying the loan off faster, not from the lower interest rate.

Many people are receiving offers like this in the mail or online via email.  The best solution is to pay extra on your current loan instead of picking up a higher monthly payment and possibly a lower interest rate.  If you simply commit more money to your month payment, you will accomplish most of the benefit of the refinance.  Also, if your finances get tight, you can always return to the old payment at no cost.  If you refinance, it will cost another refinance if you want to stop making the higher payments.

If you have questions about whether it would benefit you to refinance, please give me a call at 303-469-1254 or 800-404-0453.  I will be grateful for the opportunity to be of service.

Don Opeka – President
Licensed Colorado Mortgage Loan Originator MB100007878
Colorado Certified Mortgage Broker

Orion Mortgage, Inc.
10560 Wadsworth Blvd.
Broomfield, CO 80021
303-469-1254
800-404-0453
www.OrionMortgage.net
Don@OrionMortgageInc.com

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