Financing in San Diego>Question Details

Trulia San D…, Home Buyer in San Diego, CA

Are there any drawbacks to refinancing if you can guarantee a better rate?

Asked by Trulia San Diego, San Diego, CA Wed Nov 28, 2012

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Yes, the monthly savings should justify the hard closing costs (not to be confused with pre-paid expenses due at closing, which you would have eventually paid anyway). The rule of thumb is that if you can break even within two years, it is pretty much a no-brainer to proceed. If breakeven only occurs within 3-5 years you really need to consider whether it is worth it. More than 5 years and it is pretty much flat out not worth it.

Aside from costs, one should pay attention to the fact that their amortization schedule starts all over again. So if you refinance out of a loan you took 5 years ago... into a new 30 year fixed rate loan, and plan on making only the minimum principal and interest payment required, then you will be tacking on another 5 years of payments.

Lastly, there is a difference between the interest portion of your savings and your monthly payment savings. Sometimes it is justified to lower your monthly payment even if your interest savings are not significant, but the devil is in the details, so when in doubt have someone explain the pros and cons as it relates to your respective scenario.

One final tip whether you refinance or not... if you simply make one extra payment per year, you will knock off somewhere around 8 or 9 years of payments. This is truly the best thing you can do to save money.
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0 votes Thank Flag Link Wed Nov 28, 2012
Of course there is... There is the cost involved with refinancing. Royce is right on the money... Joan, if Deja is telling you that the money has to be recouped in the first 5 years, or drop the rate by 1% or more, that is absolutely wrong... A 1% drop in rate is a lot when you consider a million dollar loan amount vs. a 100K loan amount...

In a nutshell, you want to consider your total COST of the refinance (not including prepaids). Then, figure out the monthly savings, and calculate a breakeven point by dividing the total cost by the monthly savings. If you plan on staying in the property longer than that period of time, it is probable that it would make sense...

ALSO, there is always the possibility of doing a no cost loan. That would entail keeping the same principal balance, and taking a slightly higher than market rate (maybe .125% on a 30 year fixed) to cover all of your closing costs... That way you dont add a dollar to your balance, and you can continually drop your rate as the market gets better...

Daniel Lehman
3 votes Thank Flag Link Wed Nov 28, 2012
I wanted to chime back in here, there's been a lot of talk of making an extra mortgage payment, or going with a 15 year term. Perhaps this is just the investor in me, but let me remind everyone, we are experiencing epic low mortgage rates. In the 50 some odd years records have been kept, these are the lowest rates EVER! And they're happening RIGHT NOW! With that being said, chances are you won't ever again see rates this low, so I recommend going with a 30 year note. Why rush to pay something off at such low rates. If you have the money and no other debt, then sure, pay it off faster, but if you have other obligations that life throws at you, you'll be happy to know your mortgage debt is only costing 3.5% as you pay cash for those unexpected events, instead of on a credit card at 10% or more in interest rate.
1 vote Thank Flag Link Wed Nov 28, 2012
Short answer: Yes.

It all depends on the numbers. A better rate doesn't explain the whole picture. You have to know the cost of the refinance, and then determine if the improved rate more than offsets the costs associated with refinancing. Given all the numbers, you can determine the "breakeven" point, that's the point at which the savings from the new rate has paid for the costs of the refinance. This inevitably introduces the element of time and you have to make a judgement as to whether you will still be owning the home beyond this breakeven point. If you're not, then it was a bad decision to refinance, and that would be considered a serious drawback.

Other drawbacks: might lower payments, but extends the time you must continue to make payments. Credit inquiry added to your credit report. If you change products to say a 5/1 ARM, that could potentially backfire.

If you want help in evaluating if you should refinance, I'd be happy to help. A simple rule of thumb is if you can lower your rate by 1%, it's generally wortg doing.
1 vote Thank Flag Link Wed Nov 28, 2012
Hello Trulia Administrator! My first thought would be how much in bank fees will a home owner pay to begin a refinance process. As mentioned, the break even point should be a huge consideration. Trulia, thanks for the question!
0 votes Thank Flag Link Thu Nov 29, 2012
You do pay for refinancing, so unless you are staying in the home for a period of time(usually a minimum of 5 years) and the rate is 1% below your current rate, it may not be worth it. You should talk to a lender and see what the costs are and when does it pay you in particular to refinance.
Here is a good lender that will help you understand the +s and the -s.
Deja Correia
San Diego Funding

Good luck!
0 votes Thank Flag Link Wed Nov 28, 2012
I tell my clients when considering prices:
"How would you feel if you wait for a price (rate) and it goes up, as opposed to buying and then prices coming down"

When refinancing, the math needs to make sense and if you can recover your costs within 2-3 years, do it! When I did loans and rates came down, I would try to get them to take the 20 or 15 year loan, and most of my clients are on their way to paying off their homes instead of losing them.

Hector R. Gastelum
Realty Executives Dillon
REALTOR #01382940
efax 619-270-2516
0 votes Thank Flag Link Wed Nov 28, 2012
Trulia, if you're looking for a CMBS loan for your company, then you should definitely look into refinancing. Rates are down 60-80 bps this year. While rate locks are expensive, you can choose to pay for it if you really need a guaranteed rate.
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0 votes Thank Flag Link Wed Nov 28, 2012
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