Mortgage Refinancing and Lower Interest Rate Myth

January 7, 2008

Â© Vishy Dadsetan

One of the main reasons folks refinance their mortgage is to take advantage of lower interest rates. Letâ€™s take a look at this carefully.

For a $100,000 fixed thirty year loan, the monthly payment would go down about $63 if you went from a 6% loan to a 5% loan. Assuming that you would continue with the same loan without interruption for thirty years, the projected savings would be around $22,582 if you refinanced.

Does anyone stay in the same house with the same mortgage for 30 years?

Based on a government survey that I have to admit is about 14 years old, an average American moves 11.7 times in a lifetime. This would reduce the chances of staying in one home for thirty years very slim. I have moved 14 times so far. How many times have you moved in your lifetime?

The real question is how long are you expected to stay were you are? I leave that up to you to answer. I would mention that if you stayed in the same home for 5 years, the projected savings for the same loan I mentioned before drops down to around $3,780.

This brings us to the second question. What is the mortgage refinancing cost?

Those who have gone through at least one mortgage refinancing know that there could be dozens of costs including but not limited to the loan itself, the inspection process of the home, a clean escrow and title search, etc.

When you ask your potential mortgage company about costs, write them down and at the end ask them if there is any other costs that was not covered in your conversation. Then review the written documents related to truth in lending. Also remember to count any payment that is paid out of the funds in the escrow as cost even though you do not write a check for it directly.

After this type of review chances are that you will pay a few thousands dollars for your mortgage refinance. Once you have that number, you can make a judgment whether or not to refinance.

To make things a little more interesting, at 30% tax bracket and the deductible interest on your loan that projected savings $3,780 I mentioned gets closer to $2,646.

And if you have been in your home for only 3 years, the refinance process resets the clock on a 30 year loan to zero, which means on the basis of staying in your home for thirty years, you are now going to pay an additional $12,883 because of your mortgage refinance.

As you look at these numbers you may notice that refinance based on lower interest rates loses its luster quickly. I don’t mean to say that no one ever should use mortgage refinance as a tool. I am agreeing with what Mark Twain said, “Get your facts first, and then you can distort them as much as you please.”

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