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.
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...
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.
There are two possible drawbacks to refinancing to pay attention to.
First of all if you add the closing costs to the loan amount your going to increase what you owe on the property thereby decreasing your equity.
Secondly, if you refinance into a new 30 yr fixed, you are extending the length of time it is going to take to pay off your home assuming your only making the minimum payments.
This is why you want to consider all aspects of the refinance to make sure it fits your needs. It only takes a few dozen questions to qualify and go over the options, recouping costs and monthly payment savings. Also if one had a 30 yr fixed loan and only 20 yrs left and are starting a 30 yr loan over again, they may want to know about making an additional payment towards principal to shorten the length of years and principal balance and interest of a loan.
You may shorten the length of a 30 yr loan to about 17-20 years by making an additional mortgage payment a year and applying it towards the principal. I always tell my clients that are interested in a 15 yr loan to do a 30 and to make a large payment annually with tax returns to the principal or pay extra each month to the principal so they are not obligated the the larger payment that a 15 yr loan has. They can pay down the amount of years at their leisure when they want...
Sheryl Arndt, Real Estate Broker – Sr. Loan Officer CA only
REO & Short Sale Specialist
20+ Years Experience
Here is a good lender that will help you understand the +s and the -s.
San Diego Funding
"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