Refinance If You Can Recoup Closing Costs Quickly

Added June 27, 2004 by Ilyce R. Glink

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Summary: The old rule of thumb for refinancing was to wait until you could lower your mortgage loan interest rate by at least 2 percent. That refinance rule no longer holds true. The new way to determine whether the time is right to refinance is if you can recoup your closing costs within six months of the refinancing the mortgage loan.

Q: I have heard several statements being made regarding refinancing that basically said if you can shave 2 percentage points off the loan, go for it.

My question is : Should you refinance for a 1 percentage point gain?

My information: loan amount was $220,000 with a 6.375 percent interest rate. The payment is $1,372.51. I'm only one year into this loan and I only financed 80 percent of the home's value to avoid PMI. We plan on staying in this house for many years to come. Is it worth refinancing if I can get a rate of 5.375 percent or lower? I've seen several 5.25 percent rates with as low as 5.27 percent APR advertised on Bankrate.com.

I also have a second mortgage on the home for $35,000 of which the balance is now about $33,500. What are your thoughts on adding this to my primary mortgage?

Thank you for any light you can shed on this subject!

A: You no longer should wait until the rate drops 2 percent or more to refinance.

Instead, you should refinance if you can pay off the cost of the refinance with your savings in 6 months or less, or, if you can turn your 30-year loan into a 15-year mortgage without changing your monthly payment.

In your case, you should try to refinance as quickly as possible. I'm not sure if your home has appreciated in value enough to get a loan that will cover both the original mortgage and home equity loan, but if not, I'd use your savings on the first mortgage to prepay your second loan.

You might also call your lender and simply ask if you can "streamline" refinance your loan. That will shave perhaps 1 percent off your loan amount and cost you a few hundred dollars. It's by far the easiest way to go.

June 27, 2004.

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