I have recently spoken with many borrowers, friends and family who have been questioning whether or not they should refinance. Most of the people I speak with state the reason they have not done anything yet is because they have been in the loan for longer than 5 years and are worried about starting over with another 30 year/fixed. The goal of this post is to help you understand whether or not you should refinance and provide you with the calculations necessary to make the best decision for you and your family.

Here are a few things to look at:

  • How long will it take to recover from the closing costs?
  • How much will it save me per month?
  • How much will the total payments be over the life of the loan if I make the required payment each month?
  • If I made the same payment each month, how quick would I pay the new loan off?

Example #1:
Borrower purchased a home at 300,000.00 with an interest rate of 4.5% 30 year fixed, been in the loan for 5 years so far. They have paid the balance down to 277,000.00 at the 5 year mark.

Current Mortgage Payment: $1520.06 (Principal & Interest)
Total payments over life of loan: $547,218.25

Refinance Quote:
30 Year/Fixed at 3.875% with 3000.00 in closing costs – let’s say you add the closing costs to your balance and refinance at 280,000.00 for the new loan amount. This is assuming the borrower has 20% equity in the property.
New Mortgage Payment: $1316.66 (Principal & Interest)
Total payments over life of loan: $474,000.12

– Let’s say you make the same payment of $1520.06, how long would it take you to pay the loan off? It must be less than 25 years in order to be a benefit!
– Answer: 23.33 years, YES in this case the refinance would be beneficial, not only making the payments lower each month but if you were to make the same payment you would have the loan paid off sooner.

***The reason I took 4.5% as an example is because that’s what I have heard most of the borrowers who are hesitant to proceed with refinancing into a lower rate.***

Example #2 (Borrower must obtain MI due to LTV being higher than 80%):
Borrower purchased a property for $250,000.00 with an interest rate of 5.5% 30 YEAR/Fixed and put 20% down which has brought his starting loan balance down to $200,000.00. His property has since declined in value to $220,000.00 and has been in his loan for 5 years. Since he has been paying on his mortgage for the past 5 years, his current balance is $188,000.00. Since his property is only worth 220,000.00 that would bring his Loan to Value (LTV) to 86% which would require mortgage insurance on the new refinance.

Current Mortgage Payment: $1,135.58/mo

Refinance Quote:

30Year/Fixed at 3.875 Interest with 3000.00 in closing costs, let’s once again assume that the closing costs are added to the balance of the new loan bringing it to $201,000.00.

Monthly Mortgage Payment: $945.18 (Principal & Interest)
Monthly MI (.59%): $98.82
Total Payment: $1044.00/mo
***The payment is 91.58 less than the previous loan, if we take 3000.00 (closing costs) divided by 91.58 it equals 32.75 months or 2.72 years before you recover from the closing costs.***

If you were to make the same payment of $1,135.58 – $98.82 = $1036.76, would the loan be paid off before the old loan?

Answer: No, The loan would be paid off in 25.42 years, meaning this would NOT be beneficial (at least until the Mortgage Insurance is removed) to proceed with the refinance.

The reason for this thread is to help you understand what to look for before refinancing. Just because the interest rate is lower and your new monthly mortgage payment is lower, it may not be beneficial to refinance.

The loan officer you’re working with (hopefully me) should explain this to you and go with the product/program which suits your needs, goals and wants for your home. If you feel that you’re not receiving that level of service you may want to work with someone else.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.