Q: I was reading your advice to another reader and didn’t understand the reasoning behind your response.
You wrote “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.”
Why should someone wait until they can pay off the cost of a refinance within 6 months?
I have a $160,000 loan with 29 years left on it at 6.50 percent. If I refinance for 5.625 percent with $5,000 in closing costs, I would break even after about 3 1/2 years. Why would I not want to refinance? I know I will own this house for a minimum of 10 more years.
A: Being smart about refinancing isn’t about picking an arbitrary time — say, 6 months, 2 years or 5 years — in which you’ll pay off the loan. It’s about breaking even before you sell the home or refinance your loan again.
While you think you’ll have your house for a minimum of 10 years, the average homeowner only keeps his loan for 18 months to 2 years. If you’re like the average homeowner, the odds are good that you’ll refinance several times while still owning the same house. And, if you’re counting on making the refinance pay off after 3 1/2; years, that would be a losing proposition for you.
What I’m trying to get readers to understand is that if you can save money starting tomorrow, refinancing is a no-brainer. But once you get to the point where it takes 12 to 24 months to pay off a refinance, you risk losing money on the deal. From where I sit, taking 6 months to pay off the expenses associated with a refinance means you’ll be saving money fairly quickly. Refinancing isn’t always easy . Although refinancing has become a faster, easier and more transparent process over the past 15 years, some homeowners still dread the paperwork.
Published: Oct 3, 2005
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