Real Estate Finance Alerts

Why You Should Refinance, AGAIN!

7 Tips To Ensure You Make The Right Decision

By Todd Huettner

Rates just dropped again and you are wondering what to do. Are they low enough to cover the closing costs, again? You just did this several months ago so it can’t possibly make sense, right? Wrong!

Use these tips so you won’t miss out on lowering your largest monthly payment or get suckered into being your lender’s personal stimulus plan.

Head Games – You must avoid the psychological traps that lead to poor decisions. How long ago you refinanced does not impact what you could save today. If rates are low enough, it will make sense.

Don’t Second Guess Yourself – You did not make a mistake by moving forward with your last loan. If you saved enough money to cover the costs in a few years, it was a good deal. Refinancing several times as rates go down is a better strategy than trying to pick the single perfect moment. Waiting because you think rates will go lower is gambling - pure and simple. Gamble in Vegas, not with your finances.

Calculate The Breakeven – Simply divide the closing costs (fees excluding taxes, insurance, and interest) by the annual savings to calculate the breakeven in years for a given rate. You should refinance if you are likely to be in the home beyond the breakeven date.

Determine Your Target Rate – The highest rate you need to refinance where anything lower is extra savings. You run the numbers so you will not be tempted to lock if rates are slightly higher.

Do The Right Math – So 2 + 2 = 3 Really! Don’t add your breakeven periods together. The total breakeven for 2 loans each with a 2 year breakeven closed one year apart is 3 years, not 4. Don’t believe me? Then simply add the total savings and total closing costs to calculate the total breakeven.

Include The Hidden Savings – If your current loan is less than around a year old, your new loan will include more principal with each lower payment. To calculate this over 10 years, compare the principal included in the 60^th payment of the new loan with the 60^th payment from today of the current loan. The difference can be big. You pay the same in the end, but who keeps their loan 30 years?

Rule of Thumb – If you can lower your rate 15% or more, lower your payment 10% or more, with a breakeven of two years or less, and you plan have the loan 5 years or more, it probably makes sense.

Pull The Trigger – Waiting is the biggest mistake people make. Lock as soon as you can. Don’t wait for rates to go lower. You know your target rate makes sense and you can always re-lock if they go lower.

Todd Huettner is President of Huettner Capital, a residential and commercial real estate mortgage brokerage, specializing in complex transactions. A recognized expert with twenty years in the finance, and real estate industries, he is frequently quoted in the trade and business press.