Mortgage Minute

by Michael Scharfe

Last month I touched on the different types of refinancing. This month, I am going to go over the rate/term refinance in more detail.

When doing a rate/term refinance, it is a good idea to weigh the benefits, as well as the costs. With the additional closing costs, the extended term (unless you do a shorter term) and, depending on the amount of payment savings you have each month, it may take some time for you to feel the full benefits of the refinance. For instance, a $250,000 loan at a rate of 7.50% on a 30-year mortgage would put the monthly payments at $1,748. That same loan refinanced 3 years later at 5.50% for 30 years would reduce your payment by $272/month. With this refinance, you would have an overall life-of-loan interest savings of about $44,000 and it would take 20 months to recoup the cost of refinancing. If you were to refinance that original 7.50% rate to a 6.50% rate for 30 years, it would reduce your payments by $105/month. With this refinance, it would take almost 5 years to recoup the cost of the refinance. You would end up paying about $15,000 more in interest over the life of the loan.

Although both scenarios reduced the monthly payment, the first scenario had a shorter time period to recoup the costs and there was a significant amount of interest savings. The second scenario, however, took more time to recoup the cost of refinancing and would end up paying more interest for the life of the loan.

As is evident, there are benefits and costs with refinancing. Please talk with your lender for details regarding these costs and benefits of refinancing.

Michael Scharfe has been a lender at First Security Bank for 10 years. Reach him at [email protected].