How To Know If a Refinance Is Right For You

I have received mail from my current lender about refinancing my current mortgage, and I’d like to know what variables are best to evaluate and track so that I make the right decision…this works for home owners in Frisco, Plano, McKinney TX or any other city in Texas, it doesn’t matter.  Where would I start? (this post is speaking mostly to those looking to refinance for the purpose of rate and term changes, and not cashout refinancing)

First, your situation is different than everyother person’s in America…just like a finger print.  To make my point and be brief, here are variables that in cross section make it different:  Current unpaid balance, which month in your mortgage you are at in paying it off (in a 30 yr mortgage, more of your monthly payment is going toward principle in the latter years of your mortgage than the earlier years), interest rate, original term of loan, your discipline and future expected history of paying just the expected payment or how much extra you pay and will continue to pay in principle on your own.  Just so you know, you don’t need to know all of this just to decide if a refinance is right for you necessarily, but there is a very good chance it needs to be taken in account, so make sure your mortgage guy for life asks you questions pertinent to all these type variables.

Once you have figured out what your goal in refinancing is, and you have picked a term (30yr 15yr 10yr, etc…), you’ll want your mortgage consultant to run two amortization schedules for you to look at and go over with you.  I’ll repeat an important part of that last sentence, “look at and go over WITH YOU”…unless you have a very good reason to believe that the loan officer you are talking to can be trusted.  The first amortization schedule needs to be the breakdown of the new refinance, and the second one needs to be a “picture” of what your current mortgage looks like today, so you can track where your balance would be from year to year compared to your new refinance.  This way, if you think you are moving in the next 5 years, you can compare the balance between the two amortization schedules to see if the refinance makes since.  If you are only going to make up $2,000 extra in equity in 5 years and you think you are going to possibly move in 5 years, I’m thinking that you maybe pass on the refinance…for example, that was.

Before you run off with just those details, give me another minute here because this is when it gets REALLY important.

If you are one of those people that pay an extra amount toward your principle every month, or you pay a lump sum extra toward your principle at any point in time each year, your amortization schedule mentioned above, regarding your current amortization schedule, needs to show your balance from month to month with you paying that extra amount.  Many times in a refinance people roll in costs, and immediately sets your balance higher than where it currently is, so even a change of 1% in interest may not make the difference from one borrower to the next if you are and will continue to pay extra toward principle on your current loan. 

To sum it all up, know your goal.  Here are the two top reasons that people refinance:

• Reduce your 30 year mortgage to a 15 year mortgage and not sacrifice much in increasing your monthly payment
• simply try to get a lower monthly payment, and save money out of pocket monthly (sometimes this is regardless of the fact that it will reset your time to pay it off back to the same term you started (you bought a home 5 years ago with a 30 year mortgage and are refinancing to a 30 year mortgage, so although you made up some principle for the first 5 years, you now pay the home off in 35 total years in aggregate…not necessarily bad if you are aware and are OK with it