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Maria, Home Buyer in Alexandria, VA

Should I refinance my home now?

Asked by Maria, Alexandria, VA Fri Dec 26, 2008

We bought our house in July 2008 under a FHA loan. Should we refinance?

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Answers

6
First, to correct the past posters, government loans do NOT carry pre-payment penalties and to my knowledge, never have. Moving on...

Despite just closing, it may make sense for you to refinance. Ultimately it will depend on how long you're planning to stay in the home (assuming you live there) and if you have an itchy trigger finger to refinance everytime rates drop 0.25%. To determine that, lets look at a couple scenarios that you could put your situation into.

I'll put mortgage amounts here with your current payment (PMI, taxes & insurance extra, we're comparing apples-to-apples here) and what it would be next to it (I'm going to be 5.5% and you closed at 6.5%). I'll estimate closing costs to be $2000 (with no points to buy it down for this example, break-even may vary depending on loan size and typical costs for an area)

$125,000 mortgage - $790/mo --- $710/mo -- 25 months break-even
$200,000 mortgage - $1264/mo -- $1136/mo -- 15.6 months break-even
$300,000 mortgage - $1896/mo -- $1703/mo -- 10.4 months break-even
$400,000 mortgage - $2,528/mo -- $2271/mo -- 7.8 months break-even

If you're looking to sell or flip this home in less than the period corresponding with your loan amount, it's probably best not to do anything. If you're planning on staying there longer than the break-even, it probably makes sense to do something.

If you're the type of person who will want to refinance everytime rates drop 0.25%, it may be better to to take a slightly higher rate in exchange for a portion of your costs to be covered by the lender (to decrease your break-even period). This scenario works best with larger loan amounts.

Lastly, you'll need to think about where the money will come to close your new loan. Even though you just bought a home, you will probably have a month of trailing interest (that month you skipped) and your escrow account will now probably need to be "re-funded". The cost between closing and your pre-paids could prevent you from refinancing if you don't have funds of your own to bring to closing. Some lenders will "net-fund' your escrow account in your loan payoff (your payoff will decrease by the amount of your escrow balance) while others will create a new escrow account which could be quite a lot of money if you're nearing tax time. Ask these important questions. If the person you're working with can't answer them, look for someone else; There's nothing worse than the blind leading the blind.

Disclaimer: This scenario doesn't apply to everyone, please be mindful of where you are in your amortization schedule. For you, this may make sense but others it may or may not be depending on what your long term goals are. Individuals much further into their repayment will want to review their payment schedule and decide if they want to restart their mortgage again or if they'd like to structure the loan to pay it off in the same amount of time paying less interest or to simply lower their monthly obligation without regard to long-term interest accrual. This piece is too difficult to cover here with just one post, contact me directly for a personalized analysis if interested.

Rob Weber
Wells Fargo
847.404.7006
rob.weber@wellsfargo.com
Web Reference: http://robweber.com
1 vote Thank Flag Link Sat Dec 27, 2008
Unless you intend to stay in the home for at least the next five years or so I would not refinance due to the closing cost. What you will save, you will pay out in refinancing and closing costs for the new loan. Then there is the additional cost if you have to pay points or buy down the loan to get a better interest rate. Your credit score will determine the interest rate and points you will get or have to pay. Many times if you refinance you have to get a new appraisal, especially when housing prices are falling. Your home may not appraise for the same amount it did in July 2008 since many areas home prices are down 20%.
0 votes Thank Flag Link Wed Dec 31, 2008
Normally there should be atleast one percent rate difference & also if you want to stay 4-5 years in the same house. Just to calculate offsetting the clossing cost expense associated in re-financing. Weight all this & decide to do the best.
0 votes Thank Flag Link Sat Dec 27, 2008
Hi Maria,

Just to let you know, there are no pre-payment penalities in MA any longer. Its been a couple years since that has been in place. Your mortgage person should be able to do a side by side savings comparison for you with your current interest rate and what your new interest rate should be. I do have some clients who purchased over the summer with a rate in the high 6's low 7's and with the drop in rates the last couple of weeks, they have refinanced into the 5's.

Melissa
Web Reference: http://melissabmancini.com
0 votes Thank Flag Link Fri Dec 26, 2008
You need to check with mortgage broker who did you file there could be penalty for a refi within a certain time period. However in long run IF penalty paid could be warrant a interest rate with overall short / long term savings.
Web Reference: http://www.lynn911.com
0 votes Thank Flag Link Fri Dec 26, 2008
It depends on what you got for a rate in July, and if there is a prepayment penalty. Check your paperwork-if there is no prepayment penalty and you can cut your rate by 1% or more, it may be worth looking into.
0 votes Thank Flag Link Fri Dec 26, 2008
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